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When to Use Portfolio Objects Over Optimization Toolbox

While you can use Optimization Toolbox™ to solve portfolio optimization problems, Financial Toolbox™ has the Portfolio, PortfolioCVaR, and PortfolioMAD objects that you can use as well. Which tool you use depends on the problem case:

The following table summarizes the objective functions, constraints, and variables that apply in each case for solving a portfolio problem.

Case for Solving Portfolio ProblemObjective FunctionConstraintsInteger (Binary) Variables
"Always" case with Financial Toolbox
  • Return — Gross portfolio returns or net portfolio returns

  • Risk — Variance, CVaR, or MAD

  • Sharpe ratio (only for mean-variance problems using Portfolio object)

  • Continuous convex functions (only using the Portfolio object)

  • Return — Gross portfolio returns or net portfolio returns

  • Risk — Variance, CVaR, or MAD (risk constraints are only supported when the objective is the return)

  • Linear equalities

  • Linear inequalities

  • Tracking error (only for mean-variance problems using Portfolio object). Tracking error is supported with custom objectives using estimateCustomObjectivePortfolio. Tracking error is only supported when the objective is the return, variance, or Sharpe ratio.

  • Turnover

  • Bounds on the number of assets

  • Conditional budget constraint (an upper bound on the sum of all assets that go above a specified threshold)

  • Conditional (semicontinuous) bounds (for example, if asset i is selected, then xilbi, otherwise xi = 0)

"Preferred" case with Financial Toolbox
  • Return — Gross portfolio returns or net portfolio returns

  • Risk — Variance, CVaR, or MAD

  • Sharpe ratio (only for mean-variance problems using Portfolio object)

  • Continuous functions (only using the Portfolio object)

  • Return — Gross portfolio returns or net portfolio returns

  • Risk — Variance, CVaR, or MAD (risk constraints are only supported when the objective is the return)

  • Linear equalities

  • Linear inequalities

  • Tracking error (only for mean-variance problems using Portfolio object). Tracking error is supported with custom objectives using estimateCustomObjectivePortfolio. Tracking error is only supported when the objective is the return, variance, or Sharpe ratio.

None
Optimization ToolboxAny other nonlinear function not mentioned in Always Use Portfolio, PortfolioCVaR, or PortfolioMAD Object and Preferred Use of Portfolio, PortfolioCVaR, or PortfolioMAD ObjectAny other nonlinear function not mentioned in Always Use Portfolio, PortfolioCVaR, or PortfolioMAD Object and Preferred Use of Portfolio, PortfolioCVaR, or PortfolioMAD Object

None

Always Use Portfolio, PortfolioCVaR, or PortfolioMAD Object

The two general cases for always using the Portfolio, PortfolioCVaR, or PortfolioMAD object are:

  • Problems with both supported nonlinear constraints and conditional bounds or bounds in the number of assets.

    These problems include:

    • Minimum risk problems subject to constraints for return, linear equality, linear inequality, turnover, and tracking error where the supported risk measures are variance, conditional value-at-risk (CVaR), and mean-absolute-deviation (MAD)

    • Maximum return problems subject to constraints for linear equality, liner inequality, turnover, risk, and tracking error where the supported risk measures are variance, CVaR, and MAD

      Tracking error is supported only for mean-variance problems using the Portfolio object. For more information on the supported constraints for a Portfolio, PortfolioCVaR, or PortfolioMAD object, see Supported Constraints for Portfolio Optimization Using Portfolio Objects.

    • Custom objective minimization or maximization. The custom objective function (using estimateCustomObjectivePortfolio) must be continuous and convex subject to constraints for return, risk, linear equality, linear inequality, tracking error, and turnover.

    Tracking error is supported using the Portfolio object only when the objective is the return, variance or Sharpe ratio. Sharpe ratio is supported only using the Portfolio object.

    For more information on the supported constraints and nonlinear risk functions for Portfolio, PortfolioCVaR, and PortfolioMAD objects, see Supported Constraints for Portfolio Optimization Using Portfolio Objects and Portfolio Optimization Theory. The integer (binary) variables can come from either of the following sources: bounds on the number of assets that can be selected in the portfolio, setting conditional (semicontinuous) bounds on the assets, or adding a conditional budget constraint. For example, if asset i is selected, then xilbi, otherwise xi = 0. These problems cannot be solved using the Optimization Toolbox solvers. However, you can implement your own mixed-integer solver. For more information, see Mixed-Integer Quadratic Programming Portfolio Optimization: Problem-Based.

  • Problems with turnover constraints and sell or buy costs

    Although the continuous version of these problems can be solved by the Optimization Toolbox solvers, the variable space must be manipulated to rewrite the nonsmooth constraints into equivalent smooth constraints. Given that rewriting the problem requires optimization knowledge, it is recommended to use the Portfolio, PortfolioCVaR, and PortfolioMAD objects instead.

Preferred Use of Portfolio, PortfolioCVaR, or PortfolioMAD Object

The general case for preferred use of the Portfolio, PortfolioCVaR, or PortfolioMAD object is:

  • Continuous problems with minimum risk, maximum return, and maximum Sharpe ratio that are subject to linear equality, liner inequality, turnover, and tracking error constraints.

    Sharpe ratio is supported only for mean-variance problems using the Portfolio object. For more information on the supported constraints for a Portfolio, PortfolioCVaR, or PortfolioMAD object, see Supported Constraints for Portfolio Optimization Using Portfolio Objects.

  • Custom objective minimization or maximization. The custom objective function (using estimateCustomObjectivePortfolio) must be continuous and convex subject to constraints for return, risk, linear equality, linear inequality, tracking error, and turnover.

Tracking error is supported using the Portfolio object only when the objective is the return, variance or Sharpe ratio. Sharpe ratio is supported only using the Portfolio object.

The supported risk measures are variance, CVaR, and MAD. For more information on the supported constraints for these risk measures, see Supported Constraints for Portfolio Optimization Using Portfolio Objects, Supported Constraints for Portfolio Optimization Using PortfolioCVaR Object, and Supported Constraints for Portfolio Optimization Using PortfolioMAD Object. For all other risk measures and constraints and if tracking error is in the objective, use the Optimization Toolbox.

The advantage of the Portfolio, PortfolioCVaR, and PortfolioMAD object framework over the problem-based framework for the type of problems in the "preferred" case is that common portfolio optimization workflows are leveraged. For example, the Portfolio, PortfolioCVaR, and PortfolioMAD object framework supports the following workflows:

  • Estimating and plotting the efficient frontier

  • Exchanging the return and risk proxies from the objective function to a constraint

  • Solving the maximum Sharpe ratio problem

  • Adding bounds on the number of assets selected

  • Adding semicontinuous bounds

  • Simplifying the use of turnover constraints and sell or buy costs

Use Optimization Toolbox

The two general cases to use Optimization Toolbox is:

  • Problems that have nonlinear constraints other than the constraints for risk or tracking error

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