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From Markdown

From Markdown

Owned by Jenna Jones (Unlicensed)
Nov 28, 2024
2 min read

Constraints

Constraints are used in portfolio optimization to control the impact of the optimization process on a portfolio's weight changes and risk profile. Our platform supports two types of constraints:

  1. Trading constraints control the maximum amount of capital that can be taken in and out of any particular instrument.

  2. Risk constraints control the portfolio's characteristics in terms of relative risk or factor exposure.

The following table provides a summary of all available constraints. As detailed below, for a certain objective, a number of constraints may become unavailable.

Constraint

Type

Use-case

Constraint

Type

Use-case

Total turnover

Trading limit constraint

Optimize the portfolio by trading no more than 10% of the total portfolio value to limit trading cost.

Position turnover

Trading limit constraint

Limit the amount of capital traded in or out of any position to 5% of the portfolio value so that changes are not concentrated in any single position.

Tracking error with initial portfolio

Risk limit constraint

Limit the difference in total risk between the initial and optimized portfolio to 3% so as to conserve the risk profile of the portfolio.

Maintain factor intensity

Risk limit constraint

Optimize the portfolio while maintaining its factor intensity, so that its long-term return potential is not affected by the new investment objective.

Each optimization task performed on the platform is designed to guarantee success. This is achieved by proactively preventing constraints from making the optimization problem unfeasible. In such cases, the worst outcome for an optimization task is a return to the current portfolio, indicating that an improvement aligned with the investment objective was not identified. Consequently, not all constraints are universally available for every objective, and there may be instances where the scope or use of constraints is limited.

More details on constraints are provided in the Methodology Guide.

Country Allocation

Country allocation refers to the way that capital within a portfolio is distributed across different countries.

The weight assigned to each country is

where, refers to the weight of stock in the specified country and refers to the sum of weights of all stocks in the specified country.

The Scientific Portfolio platform shows the distribution of country weights in both absolute and relative terms (with respect to the loaded reference). The absolute view allows for the identification of concentrated positions or countries where there is little or no exposure while the relative view helps highlight the difference with respect to a reference.

Note that the results are dependent on the portfolio's stock weight profile that is available.

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