-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch
[mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of
Brian G. Peterson
Sent: Wednesday, 10 January, 2007 14:06
To: r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] solve.QP (for portfolio optimization)
On Wednesday 10 January 2007 06:26,
guillaume.nicoulaud at halbis.com wrote:
--- Brian wrote ---
"You may find, as many others in the optimization literature have,
that the short portfolio requires a different optimization
I did... and it actually doesn't work! That's why I would like to
optimize the whole portfolio instead of doing this
and shorts (in a Markowitz-like framework *for now*).
Markowitz style optimization will try to minimize variance
across the entire portfolio. You *want* the short portfolio
to decline in value, as much as possible.
While it should be possible to constrain individual
instruments to be on the short portfolio, I haven't worked
with the solve.QP function constraints in enough detail to
give you any pointers there, and I don't think a minimum
variance portfolio is really what you want.
Perhaps you can be a little more specific on the problems you
had with trying to optimize the long and short portfolios separately?
I'll give a couple examples of approaches that could work
well for your short portfolio (your exact circumstances will
vary based on the instruments you're constructing a portfolio
over, of course). In your short portfolio, you have
previously made some forecast that the instruments in the
short portfolio will decline in value. You need to make some
decision about how much to short, from the limits you have on
total short positions in your portfolio. One method of
choosing how much to short is based on your confidence in
your price target: higher confidence equals a larger short
position. Another method is to use some other appropriate
measure of risk, like downside deviation or average
drawdown: larger [downside risk measure] equals larger short
position, because the instrument tends to move further down in price.
Regards,
- Brian
--
http://braverock.com/brian/resume-quant.pdf