#' ---
#' title: "Maximizing Return Demo"
#' author: Ross Bennett
#' date: "7/17/2014"
#' ---
#' This script demonstrates how to solve a constrained maximimum return
#' 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")
init.portf
#' Maximizing return can be formulated as a linear programming problem and
#' solved very quickly using optimize_method="ROI". We are using long_only
#' constraints so it is expected that allocation is to the portfolio with the
#' highest mean return.
maxret.lo.ROI <- optimize.portfolio(R=R, portfolio=init.portf,
optimize_method="ROI", trace=TRUE)
maxret.lo.ROI
chart.Weights(maxret.lo.ROI, main="Long Only Maximize Return")
#' It is more practical to impose box constraints on the weights of assets.
#' Update the second constraint element with box constraints
init.portf <- add.constraint(portfolio=init.portf, type="box",
min=0.05, max=0.3, indexnum=2)
maxret.box.ROI <- optimize.portfolio(R=R, portfolio=init.portf,
optimize_method="ROI", trace=TRUE)
maxret.box.ROI
chart.Weights(maxret.box.ROI, main="Box Maximize Return")
#' Although the maximum return objective can be solved quickly and accurately
#' with optimize_method="ROI", it is also possible to solve this optimization
#' problem using other solvers such as random portfolios or DEoptim.
#' For random portfolios, the leverage constraints should be relaxed slightly.
init.portf$constraints[[1]]$min_sum=0.99
init.portf$constraints[[1]]$max_sum=1.01
#' Add StdDev as an object with multiplier=0. The multiplier=0 argument means
#' that it will not be used in the objective function, but will be calculated
#' for each portfolio so that we can plot the optimal portfolio in
#' mean-StdDev space.
init.portf <- add.objective(portfolio=init.portf, type="risk",
name="StdDev", multiplier=0)
#' First run the optimization with a wider bound on the box constraints that
#' also allows shorting. Then use more restrictive box constraints. This is
# 'useful to visualize impact of the constraints on the feasible space
#' Create a new portfolio called 'port1' by using init.portf and modify the
#' box constraints.
port1 <- add.constraint(portfolio=init.portf, type="box",
min=-0.3, max=0.8, indexnum=2)
maxret.box1.RP <- optimize.portfolio(R=R, portfolio=port1,
optimize_method="random",
search_size=2000,
trace=TRUE)
maxret.box1.RP
plot(maxret.box1.RP, risk.col="StdDev")
#' Create a new portfolio called 'port2' by using init.portf and modify the
#' box constraints.
port2 <- add.constraint(portfolio=init.portf, type="box",
min=0.05, max=0.3, indexnum=2)
#' Run the optimization using random portfolios.
maxret.box2.RP <- optimize.portfolio(R=R, portfolio=port2,
optimize_method="random",
search_size=2000,
trace=TRUE)
maxret.box2.RP
plot(maxret.box2.RP, risk.col="StdDev")
# Now run the optimization with DEoptim.
maxret.box.DE <- optimize.portfolio(R=R, portfolio=init.portf,
optimize_method="DEoptim",
search_size=2000,
trace=TRUE)
maxret.box.DE
plot(maxret.box.DE, risk.col="StdDev", return.col="mean")
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