A Journey Through the 'Mathematical Underworld' of Portfolio Optimization

Marcos Lopez de Prado

Guggenheim Partners, LLC; Lawrence Berkeley National Laboratory; Harvard University - RCC

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, D53

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Date posted: February 11, 2013 ; Last revised: July 5, 2015

Suggested Citation

Lopez de Prado, Marcos, A Journey Through the 'Mathematical Underworld' of Portfolio Optimization (February 16, 2013). Available at SSRN: https://ssrn.com/abstract=2214771 or http://dx.doi.org/10.2139/ssrn.2214771

Contact Information

Marcos Lopez de Prado (Contact Author)
Guggenheim Partners, LLC ( email )
330 Madison Avenue
New York, NY 10017
United States
HOME PAGE: http://www.QuantResearch.org
Lawrence Berkeley National Laboratory ( email )
1 Cyclotron Road
Berkeley, CA 94720
United States
HOME PAGE: http://www.lbl.gov

Harvard University - RCC ( email )
26 Trowbridge Street
Cambridge, MA 02138
United States
HOME PAGE: http://www.rcc.harvard.edu
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