demo/demo_max_quadratic_utility.R

#' ---
#' title: "Maximizing Quadratic Utility Demo"
#' author: Ross Bennett
#' date: "7/17/2014"
#' ---

#' This script demonstrates how to solve a constrained maximimum quadratic
#' utility portfolio optimization problem.

#' Load the package and data
library(PortfolioAnalytics)
data(edhec)
R <- edhec[, 1:10]
funds <- colnames(R)

#' Construct initial portfolio with basic constraints
init.portf <- portfolio.spec(assets=funds)
init.portf <- add.constraint(portfolio=init.portf, type="full_investment")
init.portf <- add.constraint(portfolio=init.portf, type="long_only")
init.portf <- add.objective(portfolio=init.portf, type="return", name="mean")
#' Here we can set the risk_aversion parameter to control how much risk
#' is penalized.
init.portf <- add.objective(portfolio=init.portf, type="risk", name="StdDev",
                            risk_aversion=4)
init.portf

#' Maximizing quadratic utility can be formulated as a quardratic programming 
#' problem and solved very quickly using optimize_method="ROI". Although "StdDev"
#' was specified as an objective, the quadratic programming problem uses the 
#' variance-covariance matrix in the objective function.
maxQU.lo.ROI <- optimize.portfolio(R=R, portfolio=init.portf, 
                                    optimize_method="ROI", trace=TRUE)
maxQU.lo.ROI

plot(maxQU.lo.ROI, risk.col="StdDev", 
     main=expression("Long Only Max Quadratic Utility" ~ lambda ~"=0.25"))

#' A risk aversion parameter that is very small, will effectively make the term
#' that penalizes risk zero and approximates the maximum return. Note that the
#' risk_aversion parameter must be non-zero.
init.portf$objectives[[2]]$risk_aversion <- 1e-6

maxQU.maxret.ROI <- optimize.portfolio(R=R, portfolio=init.portf, 
                                       optimize_method="ROI", trace=TRUE)
maxQU.maxret.ROI

plot(maxQU.maxret.ROI, risk.col="StdDev", 
     main=expression("Long Only Max Quadratic Utility" ~ lambda ~"= 1e-6"))

#' A risk aversion parameter that is very large will heavily penalize the risk 
#' term in the objective function and approximates the minimum variance portfolio.
init.portf$objectives[[2]]$risk_aversion <- 1e6

maxQU.minvol.ROI <- optimize.portfolio(R=R, portfolio=init.portf, 
                                       optimize_method="ROI", trace=TRUE)
maxQU.minvol.ROI

plot(maxQU.minvol.ROI, risk.col="StdDev", 
     main=expression("Long Only Max Quadratic Utility" ~ lambda ~"= 1e6"))
braverock/PortfolioAnalytics documentation built on Nov. 24, 2022, 2:38 p.m.