LSPM - Unexpected Results

Josh,

On your blog, you wrote that.

"The methodology therein suggests finding optimal f values first, then
calculating the portfolio that satisfies the margin constraints but keeps
the ratio of each market system to one another the same."

Since I want to invest 100% of my portfolio with no margin allowed, couldn't
I just take:
f / sum(f) for each asset.

Then use those as the percentage of my port to invest?

The concept of "contracts" or "units" doesn't seem applicable since I'm just
interested in percentage of fund to invest in each asset.

Do I have this correct?

-N

On 12/27/10 12:07 PM, Joshua Ulrich wrote:

On Mon, Dec 27, 2010 at 1:10 PM, Noah Silverman <noah at smartmediacorp.com>
wrote:

Josh,

1)
R version: 2.11.0
LSPM Version: ?(Don't know where to check)

packageDescription("LSPM")  # revision 49 is most recent

2)
I'm fine with it taking many hours - that's to be expected. ?There are
48 observations for each of the 13 assets.

3)
The last output line from the optimizer is:
0 0.5908 0.545 0.0954 0.41 0 0.0969 0.0078 0.6066 0.4896 0.0113 0.7568 1
-0.5036 -1 best value: ?-1

The last two values are negative, which I am now assuming are the "z"
values. ?But do not know what "z" values are - don't see any mention of
them in the Handbook of Portfolio Mathematics.

They're discussed in The Leverage Space Trading Model.  They control
the aggressiveness of your position sizing when your equity is above /
below target.

4)
Is there documentation about how to specify the margin and other
constraints? ?The help files in R left me a bit lost.

Sorry about the lack of documentation... here's how to specify margin
constraints:
http://blog.fosstrading.com/2010/08/margin-constraints-with-lspm.html

Other constraints can be specified and passed via the
constrFun/constrVal arguments, just like you specified the drawdown
constraint.

I'm trying this while looking at a portfolio that is a "fund of funds".
So, they want to invest 100% of their fund and can't short anything.
Furthermore, they can only re-balance every 90 days, which only adds
further constraint.


I'm using the jpt example function from your blog with n=4 and the
following call in R:
DEctrl <- list(NP=100, itermax=1000, trace=1 )
res <- maxProbProfit(jpt, 1e-6, 6, probDrawdown, 0.1, DD=0.2,
calc.max=4, snow=cl, control=DEctrl)

Why are you setting itermax=1000?

Thanks!!!!

--
Noah


--
Joshua Ulrich  |  FOSS Trading: www.fosstrading.com



On 12/27/10 10:23 AM, Joshua Ulrich wrote:

Noah,

On Mon, Dec 27, 2010 at 12:02 PM, Noah Silverman
<noah at smartmediacorp.com> wrote:

Hi,

I've been playing with the LSPM library from optimizing a portfolio of
13 assets (Using the interesting Leverage Space model developed by Ralph
Vince.)

Which version (and revision) of LSPM are you using? ?Which version of R?

Using the function: ?maxProbProfit

res <- maxProbProfit(jpt, 1e-6, 6, probDrawdown, 0.1, DD=0.2,
calc.max=4, snow=cl, control=DEctrl)

It takes a LONG time for the optmizer to find a solution.

It's always going to take a long time, especially with 13 assets and
100 optimizer iterations (the default). ?How many observations are in
your lsp object? ?A reproducible example, or just some sample data,
would really help here.

It has found a solution that has a 100% probability of profit given the
constraints.

The odd thing is that several of the values (optimal F) are negative.
My understanding is that indicates shorting the asset. ?This assets in
this portfolio can't be shorted.

I doubt any f values are negative because they're bound between [0,1]
during the optimization. ?My guess is that you're referring to the two
"z" values, which will always be negative.

Here's a quick example from ?maxProbProfit:

require(LSPM)
data(port)
ipop <- cbind(runif(50,0,0.01),runif(50,0,0.01),runif(50,0,0.01),
? runif(50,-1,-0.8),runif(50,-1,-0.8))
DEctrl <- list(itermax=11, NP=50, initial=ipop)
res <- maxProbProfit(port, 1e-6, 4, probDrawdown, 0.1,
? DD=0.2, calc.max=4, control=DEctrl)

res

$f
[1] 0.002308994 0.001884296 0.116972712

$z
? ? zminus ? ? ?zplus
-0.9256852 -0.9976883

$profitProb
[1] 0.9963587


I've never read about shorting with the LSPM model, is this common?
Is there a way to indicate, as a constraint, not to short?
I have a portfolio of X dollars to allocate, so the percentages must sum
to one, how do I do this once I get the F values?

You need to do this during the optimization via the "margin" and
"equity" arguments.

HTH,
--
Joshua Ulrich ?| ?FOSS Trading: www.fosstrading.com



Thanks in advance for any and all suggestions!

--
Noah