A Journey Through the 'Mathematical Underworld' of Portfolio Optimization
Marcos Lopez de Prado
Hess Energy Trading Company; Lawrence Berkeley National Laboratory; RCC at Harvard University
February 16, 2013
* It has been estimated that the current size of the asset management industry is approximately US$58 trillion.
* Portfolio optimization is one of the problems most frequently encountered by financial practitioners. It appears in various forms in the context of Trading, Risk Management and Capital Allocation.
* The Critical Line Algorithm (CLA) is the only algorithm specifically designed for inequality-constrained portfolio optimization problems, which guarantees that the exact solution is found after a predefined number of iterations.
* Surprisingly, open-source implementations of CLA in a scientific language appear to be inexistent or unavailable.
* The lack of publicly available CLA software, commercially or open-source, means that trillions of dollars are likely to be suboptimally allocated as a result of practitioners using general-purpose quadratic optimizers.
* We believe that a large amount of financial firms and practitioners will benefit from our robust implementation of CLA in a scientific language.
The code is available in the author's website.
Number of Pages in PDF File: 26
Keywords: portfolio selection, quadratic programming, portfolio optimization, constrained efficient frontier, turning point, Kuhn-Tucker conditions, risk aversion
JEL Classification: C02, G11, G14, D53working papers series
Date posted: February 11, 2013 ; Last revised: April 22, 2013
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