Optimizing Optimization: The Next Generation of Optimization Applications and Theory (Quantitative Finance)

18 Optimizing Optimization

1.6 Fund of funds

An organization might want to control the risk of all their funds against one
benchmark, but give fund managers different mandates with different bench-
marks and risk restrictions. If the managers each individually optimize their

0

2

4

6

8

10

12

No

constraint

11.% Pf Vol10.5% Pf Vol10% Pf Vol9.5% Pf Vol

9% Pf Vol

Portfolio volatility

Tracking error

Figure 1.11 Risk with portfolio volatility constrained.

3.5

2.5

3

1.5

0.5

0

No

constraint

Tracking error (%)

3% TE

2.5% TE

2% TE

1.5% TE

1% TE

1

2

Market portfolio tracking error

Model portfolio tracking error

Figure 1.12 Risk with tracking error constrained against a model portfolio.