Asset Allocation and Portfolio Optimization
Overview
From asset allocation theory to practical implementation, this skill covers classical frameworks (MPT, BL, risk budgeting, all-weather) and the usage of the four optimizers built into this system. The output can be written directly into config.json.
Asset Allocation Theory
1. Modern Portfolio Theory (MPT, Markowitz)
Core idea: maximize expected return for a given level of risk (the efficient frontier).
Optimization problem:
min w'Σw (portfolio variance)
s.t. w'μ = target_return
Σw = 1
w ≥ 0 (no shorting)
| Advantages | Disadvantages |
|---|---|
| Mathematically rigorous | Extremely sensitive to inputs (garbage in, garbage out) |
| Efficient frontier is visualizable | Concentrated-allocation problem (often produces extreme weights) |
| Foundational framework | Assumes normality and ignores fat tails |
Practical advice: do not use raw MPT directly. Add constraints (upper/lower bounds, sector limits) or use a regularized version.
2. Black-Litterman Model
Core idea: start from market equilibrium and incorporate investor views.
Steps:
1. Re…
