Package ‘PortfolioAnalytics’

April 19, 2015

Type Package
Title Portfolio Analysis, Including Numerical Methods for Optimization
of Portfolios
Version 1.0.3636
Date 2015-04-18
Maintainer Brian G. Peterson <brian@[Link]>
Description Portfolio optimization and analysis routines and graphics.
Depends R (>= 2.14.0), zoo, xts (>= 0.8), foreach,
PerformanceAnalytics (>= 1.1.0)
Suggests quantmod, DEoptim(>= 2.2.1), iterators, fGarch, Rglpk,
quadprog, ROI (>= 0.1.0), [Link] (>= 0.0.2),
[Link] (>= 0.0.2), [Link] (>= 0.0.2),
pso, GenSA, corpcor, testthat, nloptr (>= 1.0.0), MASS,
robustbase
License GPL
Copyright (c) 2004-2015
NeedsCompilation yes
Author Brian G. Peterson [cre, aut, cph],
Peter Carl [aut, cph],
Kris Boudt [ctb, cph],
Ross Bennett [ctb, cph],
Hezky Varon [ctb],
Guy Yollin [ctb],
R. Douglas Martin [ctb]
Repository CRAN
Date/Publication 2015-04-19 07:38:57

R topics documented:
PortfolioAnalytics-package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1
2 R topics documented:

[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
applyFUN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
barplotGroupWeights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
BlackLittermanFormula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
box_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
check_constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
cokurtosisMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
cokurtosisSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
constrained_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
constraint_ROI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
constraint_v2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
coskewnessMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
coskewnessSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
covarianceMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
covarianceSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
diversification_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
EntropyProg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
etl_milp_opt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
etl_opt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
extractCokurtosis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
extractCoskewness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
extractCovariance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
extractEfficientFrontier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
extractGroups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
extractObjectiveMeasures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
R topics documented: 3

extractStats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
extractWeights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
factor_exposure_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
fn_map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
generatesequence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
get_constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
gmv_opt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
gmv_opt_leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
gmv_opt_ptc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
gmv_opt_toc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
group_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
group_fail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
HHI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
insert_constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
insert_objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
leverage_exposure_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
maxret_milp_opt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
maxret_opt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
minmax_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
portfolio_risk_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
position_limit_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
pos_limit_fail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
[Link] . . . . . . . . . . . . . . . . . . . . . . . 95
4 PortfolioAnalytics-package

quadratic_utility_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
randomize_portfolio_v1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
randomize_portfolio_v2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
random_portfolios_v1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
random_portfolios_v2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
random_walk_portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
return_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
return_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
risk_budget_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
rp_grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
rp_sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
rp_simplex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
rp_transform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
scatterFUN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
[Link].moments_v1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
[Link].moments_v2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . 111
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
trailingFUN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
transaction_cost_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
turnover_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
turnover_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
update_constraint_v1tov2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
[Link] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
weight_concentration_objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
weight_sum_constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Index 121

PortfolioAnalytics-package
Numeric methods for optimization of portfolios

Description
PortfolioAnalytics is an R package to provide numerical solutions for portfolio problems with
complex constraints and objective sets. The goal of the package is to aid practicioners and re-
searchers in solving portfolio optimization problems with complex constraints and objectives that
mirror real-world applications.
One of the goals of the packages is to provide a common interface to specify constraints and ob-
jectives that can be solved by any supported solver (i.e. optimization method). Currently supported
optimization methods include
PortfolioAnalytics-package 5

• random portfolios
• differential evolution
• particle swarm optimization
• generalized simulated annealing
• linear and quadratic programming routines

The solver can be specified with the optimize_method argument in [Link] and
[Link]. The optimize_method argument must be one of "random",
"DEoptim", "pso", "GenSA", "ROI", "quadprog", "glpk", or "symphony".
Additional information on random portfolios is provided below. The differential evolution algo-
rithm is implemented via the DEoptim package, the particle swarm optimization algorithm via the
pso package, the generalized simulated annealing via the GenSA package, and linear and quadratic
programming are implemented via the ROI package which acts as an interface to the Rglpk, Rsymphony,
and quadprog packages.
A key strength of PortfolioAnalytics is the generalization of constraints and objectives that can
be solved.
If optimize_method="ROI" is specified, a default solver will be selected based on the optimiza-
tion problem. The glpk solver is the default solver for LP and MILP optimization problems. The
quadprog solver is the default solver for QP optimization problems. For example, optimize_method = "quadprog"
can be specified and the optimization problem will be solved via ROI using the quadprog plugin
package.
The extension to ROI solves a limited type of convex optimization problems:

• Maxmimize portfolio return subject leverage, box, group, position limit, target mean return,
and/or factor exposure constraints on weights.
• Minimize portfolio variance subject to leverage, box, group, turnover, and/or factor exposure
constraints (otherwise known as global minimum variance portfolio).
• Minimize portfolio variance subject to leverage, box, group, and/or factor exposure constraints
and a desired portfolio return.
• Maximize quadratic utility subject to leverage, box, group, target mean return, turnover, and/or
factor exposure constraints and risk aversion parameter. (The risk aversion parameter is passed
into [Link] as an added argument to the portfolio object).
• Maximize portfolio mean return per unit standard deviation (i.e. the Sharpe Ratio) can be done
by specifying maxSR=TRUE in [Link]. If both mean and StdDev are specified
as objective names, the default action is to maximize quadratic utility, therefore maxSR=TRUE
must be specified to maximize Sharpe Ratio.
• Minimize portfolio ES/ETL/CVaR optimization subject to leverage, box, group, position limit,
target mean return, and/or factor exposure constraints and target portfolio return.
• Maximize portfolio mean return per unit ES/ETL/CVaR (i.e. the STARR Ratio) can be done
by specifying maxSTARR=TRUE in [Link]. If both mean and ES/ETL/CVaR
are specified as objective names, the default action is to maximize mean return per unit
ES/ETL/CVaR.

These problems also support a weight_concentration objective where concentration of weights as

measured by HHI is added as a penalty term to the quadratic objective.
6 PortfolioAnalytics-package

Because these convex optimization problem are standardized, there is no need for a penalty term.
The multiplier argument in [Link] passed into the complete constraint object are ing-
nored by the ROI solver.
Many real-world portfolio optimization problems are global optimization problems, and therefore
are not suitable for linear or quadratic programming routines. PortfolioAnalytics provides a
random portfolio optimization method and also utilizes the R packages DEoptim, pso, and GenSA
for solving non-convex global optimization problems.
PortfolioAnalytics supports three methods of generating random portfolios.
• The sample method to generate random portfolios is based on an idea by Pat Burns. This is
the most flexible method, but also the slowest, and can generate portfolios to satisfy leverage,
box, group, position limit, and leverage constraints.
• The simplex method to generate random portfolios is based on a paper by W. T. Shaw. The
simplex method is useful to generate random portfolios with the full investment constraint
(where the sum of the weights is equal to 1) and min box constraints. Values for min_sum
and max_sum of the leverage constraint will be ignored, the sum of weights will equal 1.
All other constraints such as the box constraint max, group and position limit constraints will
be handled by elimination. If the constraints are very restrictive, this may result in very few
feasible portfolios remaining. Another key point to note is that the solution may not be along
the vertexes depending on the objective. For example, a risk budget objective will likely place
the portfolio somewhere on the interior.
• The grid method to generate random portfolios is based on the gridSearch function in pack-
age NMOF. The grid search method only satisfies the min and max box constraints. The
min_sum and max_sum leverage constraint will likely be violated and the weights in the ran-
dom portfolios should be normalized. Normalization may cause the box constraints to be
violated and will be penalized in constrained_objective.
PortfolioAnalytics leverages the PerformanceAnalytics package for many common objective
functions. The objective types in PortfolioAnalytics are designed to be used with PerformanceAnalytics
functions, but any user supplied valid R function can be used as an objective.

Optimization
This summary attempts to provide an overview of how to construct a portfolio object with con-
straints and objectives, run the optimization, and chart the results.
The portfolio object is initialized with the [Link] function. The main argument to
[Link] is assets. The assets argument can be a scalar value for the number of as-
sets, a character vector of fund names, or a named vector of initial weights.
Adding constraints to the portfolio object is done with [Link]. The [Link]
function is the main interface for adding and/or updating constraints to the portfolio object. This
function allows the user to specify the portfolio to add the constraints to, the type of constraints,
arguments for the constraint, and whether or not to enable the constraint. If updating an existing
constraint, the indexnum argument can be specified.
Objectives can be added to the portfolio object with [Link]. The [Link] function
is the main function for adding and/or updating objectives to the portfolio object. This function
allows the user to specify the portfolio to add the objectives to, the type, name of the objective
function, arguments to the objective function, and whether or not to enable the objective. If updating
an existing objective, the indexnum argument can be specified.
PortfolioAnalytics-package 7

With the constraints and objectives specified in the portfolio object, the portfolio object can be
passed to [Link] or [Link] to run the optimization.
Arguments to [Link] include asset returns, the portfolio obect specifying constraints
and objectives, optimization method, and other parameters specific to the solver. [Link]
adds support for backtesting portfolio optimization through time with rebalancing or rolling periods.

Advanced Optimization
In addition to the more standard optimizations described above, PortfolioAnalytics also sup-
ports multi-layer optimization and regime switching optimization.
Support for multi-layer optimization allows one to construct a top level portfolio and several sub-
portfolios with potentially different assets, constraints, and objectives. First, each sub-portfolio is
optimized out-of-sample which creates a time series of returns. One can think of the out of sample
returns for each sub-portfolio as the returns for a synthetic instrument. Finally, the out-of-sample
returns of each sub-portfolio are then used as inputs for the top level optimization. The top level
portfolio and sub-portfolios are created as normal using [Link], [Link], and
[Link]. The multi-layer portfolio specification object is first initialized by passing the top
level portfolio to [Link]. Sub-portfolios are then added with [Link].
The multi-layer portfolio specification object can then be passed to [Link] and
[Link]. See demo(multi_layer_optimization).
Support for regime switching models allows one to change constraints and objectives depending on
the current regime. Portfolios are created as normal with [Link], [Link], and
[Link]. The portfolios are then combined with a regime object using [Link]
to create a regime portfolio specification which can then be passed to [Link] and
[Link]. Regime switching optimization is implemented in such a
way that any arbitrary regime model can be used. See demo(regime_switching).

Portfolio Moments
The PortfolioAnalytics framework to estimate solutions to constrained optimization problems
is implemented in such a way that the moments of the returns are set once for use in lower level
optimization functions. The [Link] function computes the first, second, third,
and fourth moments depending on the objective function(s) in the portfolio object. For ex-
ample, if the third and fourth moments do not need to be calculated for a given objective, then
[Link] will try to detect this and not compute those moments. Currently, [Link]
implements methods to compute moments based on sample estimates, higher moments from fitting
a statistical factor model based on the work of Kris Boudt, the Black Litterman model, and the Fully
Flexible Framework based on the work of Attilio Meucci (NEED REFERENCE HERE). See the
Custom Moment and Objective Functions vignette for a more detailed description and examples.

Charts and Graphs

Intuition into the optimization can be aided through visualization. The goal of creating the charts is
to provide visualization tools for optimal portfolios regardless of the chosen optimization method.
[Link] plots the weights of the optimal portfolio. [Link] plots the optimal
portfolio in risk-reward space. The random portfolios, DEoptim, and pso solvers will return trace
portfolio information at each iteration when [Link] is run with trace=TRUE. If this
is the case, [Link] will plot these portfolios so that the feasible space can be easily
8 PortfolioAnalytics-package

visualized. Although the GenSA and ROI solvers do not return trace portfolio information, ran-
dom portfolios can be be generated with the argument rp=TRUE in [Link]. A plot
function is provided that will plot the weights and risk-reward scatter chart. The component risk
contribution can be charted for portfolio optimization problems with risk budget objectives with
[Link]. Neighbor portfolios can be plotted in [Link], [Link],
and [Link].
Efficient frontiers can be extracted from [Link] objects or created from a portfolio
object. The efficient frontier can be charted in risk-reward space with [Link].
The weights along the efficient frontier can be charted with [Link].
Multiple objects created via [Link] can be combined with [Link]
for visual comparison. The weights of the optimal portfolios can be plotted with [Link].
The optimal portfolios can be compared in risk-reward space with [Link]. The portfo-
lio component risk contributions of the multiple optimal portfolios can be plotted with [Link].

Demos
PortfolioAnalytics contains a comprehensive collection of demos to demonstrate the function-
ality from very basic optimization problems such as estimating the solution to a minimum variance
portfolio to more complex optimization problems with custom moment and objective functions.

Vignettes
TODO

Package Dependencies
Several of the functions in the PortfolioAnalytics package require time series data of returns
and the xts package is used for working with time series data.
The PerformanceAnalytics package is used for many common objective functions. The objective
types in PortfolioAnalytics are designed to be used with PerformanceAnalytics functions
such as StdDev, VaR, and ES.
The foreach and iterators packages are used extensively throughout the package to support par-
allel programming. The primary functions where foreach loops are used is [Link],
[Link], and [Link].
In addition to a random portfolios optimzation method, PortfolioAnalytics supports backend
solvers by leveraging the following packages: DEoptim, pso, GenSA, ROI and associated ROI plugin
packages.

Further Work
Continued work to improved charts and graphs.
Continued work to improve features to combine and compare multiple optimal portfolio objects.
Support for more solvers.
Comments, suggestions, and/or code patches are welcome.

Acknowledgements
TODO
PortfolioAnalytics-package 9

Author(s)

Ross Bennett
Kris Boudt
Peter Carl
Brian G. Peterson

Maintainer: Brian G. Peterson <brian@[Link]>

References

Boudt, Kris and Lu, Wanbo and Peeters, Benedict, Higher Order Comoments of Multifactor Models
and Asset Allocation (June 16, 2014). Available at SSRN: [Link] or
[Link]
Chriss, Neil A and Almgren, Robert, Portfolios from Sorts (April 27, 2005). Available at SSRN:
[Link] or [Link]

Meucci, Attilio, The Black-Litterman Approach: Original Model and Extensions (August 1, 2008).
Shorter version in, THE ENCYCLOPEDIA OF QUANTITATIVE FINANCE, Wiley, 2010. Avail-
able at SSRN: [Link] or [Link]

Meucci, Attilio, Fully Flexible Views: Theory and Practice (August 8, 2008). Fully Flexible Views:
Theory and Practice, Risk, Vol. 21, No. 10, pp. 97-102, October 2008. Available at SSRN:
[Link]
Scherer, Bernd and Martin, Doug, Modern Portfolio Optimization. Springer. 2005.

Shaw, William Thornton, Portfolio Optimization for VAR, CVaR, Omega and Utility with General
Return Distributions: A Monte Carlo Approach for Long-Only and Bounded Short Portfolios with
Optional Robustness and a Simplified Approach to Covariance Matching (June 1, 2011). Available
at SSRN: [Link] or [Link]

See Also

CRAN task view on Empirical Finance

[Link]
CRAN task view on Optimization
[Link]
Large-scale portfolio optimization with DEoptim
[Link]
pdf
10 [Link]

[Link] Asset Ranking

Description
Compute the first moment from a single complete sort

Usage
[Link](R, order, ...)

Arguments
R xts object of asset returns
order a vector of indexes of the relative ranking of expected asset returns in ascending
order. For example, order = c(2, 3, 1, 4) means that the expected returns
of R[,2] < R[,3], < R[,1] < R[,4].
... any other passthrough parameters

Details
This function computes the estimated centroid vector from a single complete sort using the analyti-
cal approximation as described in R. Almgren and N. Chriss, "Portfolios from Sorts". The centroid
is estimated and then scaled such that it is on a scale similar to the asset returns. By default, the
centroid vector is scaled according to the median of the asset mean returns.

Value
The estimated first moments based on ranking views

References
R. Almgren and N. Chriss, "Portfolios from Sorts" [Link]
abstract_id=720041

See Also
[Link] [Link] [Link] [Link]

Examples
data(edhec)
R <- edhec[,1:4]
[Link](R, c(2, 3, 1, 4))
[Link] 11

[Link] General interface for adding and/or updating optimization con-

straints.

Description
This is the main function for adding and/or updating constraints to the [Link] object.

Usage
[Link](portfolio, type, enabled = TRUE, message = FALSE, ...,
indexnum = NULL)

Arguments
portfolio an object of class ’portfolio’ to add the constraint to, specifying the constraints
for the optimization, see [Link]
type character type of the constraint to add or update, currently ’weight_sum’ (also
’leverage’ or ’weight’), ’box’, ’group’, ’turnover’, ’diversification’, ’position_limit’,
’return’, ’factor_exposure’, or ’leverage_exposure’
enabled TRUE/FALSE. The default is enabled=TRUE.
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify constraints
indexnum if you are updating a specific constraint, the index number in the $constraints
list to update

Details
The following constraint types may be specified:
• weight_sum, weight, leverage Specify constraint on the sum of the weights, see weight_sum_constraint
• full_investment Special case to set min_sum=1 and max_sum=1 of weight sum constraints
• dollar_neutral, active Special case to set min_sum=0 and max_sum=0 of weight sum con-
straints
• box box constraints for the individual asset weights, see box_constraint
• long_only Special case to set min=0 and max=1 of box constraints
• group specify the sum of weights within groups and the number of assets with non-zero
weights in groups, see group_constraint
• turnover Specify a constraint for target turnover. Turnover is calculated from a set of initial
weights, see turnover_constraint
• diversification target diversification of a set of weights, see diversification_constraint
• position_limit Specify the number of non-zero, long, and/or short positions, see position_limit_constraint
• return Specify the target mean return, see return_constraint
• factor_exposure Specify risk factor exposures, see factor_exposure_constraint
• leverage_exposure Specify a maximum leverage exposure, see leverage_exposure_constraint
12 [Link]

Author(s)
Ross Bennett

See Also
[Link] weight_sum_constraint, box_constraint, group_constraint, turnover_constraint,
diversification_constraint, position_limit_constraint, return_constraint, factor_exposure_constraint,
leverage_exposure_constraint

Examples
data(edhec)
returns <- edhec[, 1:4]
[Link] <- colnames(returns)
pspec <- [Link](assets=[Link])
# Add the full investment constraint that specifies the weights must sum to 1.
pspec <- [Link](portfolio=pspec, type="weight_sum", min_sum=1, max_sum=1)
# The full investment constraint can also be specified with type="full_investment"
pspec <- [Link](portfolio=pspec, type="full_investment")

# Another common constraint is that portfolio weights sum to 0.

pspec <- [Link](portfolio=pspec, type="weight_sum", min_sum=0, max_sum=0)
pspec <- [Link](portfolio=pspec, type="dollar_neutral")
pspec <- [Link](portfolio=pspec, type="active")

# Add box constraints

pspec <- [Link](portfolio=pspec, type="box", min=0.05, max=0.4)

# min and max can also be specified per asset

pspec <- [Link](portfolio=pspec, type="box", min=c(0.05, 0, 0.08, 0.1),
max=c(0.4, 0.3, 0.7, 0.55))
# A special case of box constraints is long only where min=0 and max=1
# The default action is long only if min and max are not specified
pspec <- [Link](portfolio=pspec, type="box")
pspec <- [Link](portfolio=pspec, type="long_only")

# Add group constraints

pspec <- [Link](portfolio=pspec, type="group", groups=list(c(1, 2, 1), 4),
group_min=c(0.1, 0.15), group_max=c(0.85, 0.55), group_labels=c("GroupA", "GroupB"),
group_pos=c(2, 1))

# Add position limit constraint such that we have a maximum number of three
# assets with non-zero weights.
pspec <- [Link](portfolio=pspec, type="position_limit", max_pos=3)

# Add diversification constraint

pspec <- [Link](portfolio=pspec, type="diversification", div_target=0.7)

# Add turnover constraint

pspec <- [Link](portfolio=pspec, type="turnover", turnover_target=0.2)

# Add target mean return constraint

[Link] 13

pspec <- [Link](portfolio=pspec, type="return", return_target=0.007)

# Example using the indexnum argument

portf <- [Link](assets=[Link])
portf <- [Link](portf, type="full_investment")
portf <- [Link](portf, type="long_only")

# indexnum corresponds to the index number of the constraint

# The full_investment constraint was the first constraint added and has
# indexnum=1
portf$constraints[[1]]

# View the constraint with indexnum=2

portf$constraints[[2]]

# Update the constraint to relax the sum of weights constraint

portf <- [Link](portf, type="weight_sum",
min_sum=0.99, max_sum=1.01,
indexnum=1)

# Update the constraint to modify the box constraint

portf <- [Link](portf, type="box",
min=0.1, max=0.8,
indexnum=2)

[Link] General interface for adding optimization objectives, including risk,

return, and risk budget

Description
This function is the main function for adding and updating business objectives in an object of type
[Link].

Usage
add.objective_v1(constraints, type, name, arguments = NULL, enabled = TRUE,
..., indexnum = NULL)

add.objective_v2(portfolio, constraints = NULL, type, name,

arguments = NULL, enabled = TRUE, ..., indexnum = NULL)

[Link](portfolio, constraints = NULL, type, name, arguments = NULL,

enabled = TRUE, ..., indexnum = NULL)

Arguments
portfolio an object of type ’portfolio’ to add the objective to, specifying the portfolio for
the optimization, see portfolio
14 [Link]

constraints a ’v1_constraint’ object for backwards compatibility, see constraint

type character type of the objective to add or update, currently ’return’,’risk’, ’risk_budget’,
’quadratic_utility’, or ’weight_concentration’
name name of the objective, should correspond to a function, though we will try to
make allowances
arguments default arguments to be passed to an objective function when executed
enabled TRUE/FALSE
... any other passthru parameters
indexnum if you are updating a specific objective, the index number in the $objectives list
to update

Details
In general, you will define your objective as one of the following types: ’return’, ’risk’, ’risk_budget’,
’quadratic utility’, or ’weight_concentration’. These have special handling and intelligent defaults
for dealing with the function most likely to be used as objectives, including mean, median, VaR,
ES, etc.
Objectives of type ’turnover’ and ’minmax’ are also supported.

Author(s)
Brian G. Peterson and Ross Bennett

See Also
objective, [Link]

Examples
data(edhec)
returns <- edhec[,1:4]
[Link] <- colnames(returns)
portf <- [Link](assets=[Link])
# Add some basic constraints
portf <- [Link](portf, type="full_investment")
portf <- [Link](portf, type="long_only")

# Creates a new portfolio object using portf and adds a quadratic utility
# objective. This will add two objectives to the portfolio object; 1) mean and
# 2) var. The risk aversion parameter is commonly referred to as lambda in the
# quadratic utility formulation that controls how much the portfolio variance
# is penalized.
[Link] <- [Link](portf, type="quadratic_utility",
risk_aversion=0.25)

# Creates a new portfolio object using portf and adds mean as an objective
[Link] <- [Link](portf, type="return", name="mean")

# Creates a new portfolio object using portf and adds StdDev as an objective
[Link] 15

[Link] <- [Link](portf, type="risk", name="StdDev")

# Creates a new portfolio object using portf and adds ES as an objective.

# Note that arguments to ES are passed in as a named list.
[Link] <- [Link](portf, type="risk", name="ES",
arguments=list(p=0.925, clean="boudt"))

# Creates a new portfolio object using [Link] and adds a risk budget
# objective with limits on component risk contribution.
# Note that arguments to ES are passed in as a named list.
[Link] <- [Link]([Link], type="risk_budget", name="ES",
arguments=list(p=0.925, clean="boudt"),
min_prisk=0, max_prisk=0.6)

# Creates a new portfolio object using [Link] and adds a risk budget
# objective with equal component risk contribution.
# Note that arguments to ES are passed in as a named list.
[Link] <- [Link]([Link], type="risk_budget", name="ES",
arguments=list(p=0.925, clean="boudt"),
min_concentration=TRUE)

# Creates a new portfolio object using portf and adds a weight_concentration

# objective. The conc_aversion parameter controls how much concentration is
# penalized. The portfolio concentration is defined as the Herfindahl Hirschman
# Index of the weights.
[Link] <- [Link](portf, type="weight_concentration",
name="HHI", conc_aversion=0.01)

[Link] Add sub-portfolio

Description
Add a sub-portfolio to a multiple layer portfolio specification object

Usage
[Link]([Link], portfolio, optimize_method = c("DEoptim",
"random", "ROI", "pso", "GenSA"), search_size = 20000, rp = NULL,
rebalance_on = NULL, training_period = NULL, trailing_periods = NULL,
..., indexnum = NULL)

Arguments
[Link] a [Link] object
portfolio a portfolio object to add as a sub portfolio.
optimize_method
optimization method for the sub portfolio
search_size integer, how many portfolios to test, default 20,000
16 applyFUN

rp matrix of random portfolio weights, default NULL, mostly for automated use
by rebalancing optimization or repeated tests on same portfolios
rebalance_on haracter string of period to rebalance on. See endpoints for valid names.
training_period
an integer of the number of periods to use as a training data in the front of the
returns data
trailing_periods
an integer with the number of periods to roll over (i.e. width of the moving
or rolling window), the default is NULL will run using the returns data from
inception
... additonal passthrough parameters to [Link]
indexnum the index number of the sub portfolio. If indexnum=NULL (the default), then the
sub portfolio object is appended to the list of sub portfolios in the [Link]
object. If indexnum is specified, the portfolio in that index number is overwrit-
ten.

Author(s)
Ross Bennett

See Also
[Link] [Link] [Link] [Link]

applyFUN Apply a risk or return function to a set of weights

Description
This function is used to calculate risk or return metrics given a matrix of weights and is primarily
used as a convenience function used in [Link] functions

Usage
applyFUN(R, weights, FUN = "mean", arguments)

Arguments
R xts object of asset returns
weights a matrix of weights generated from random_portfolios or [Link]
FUN name of a function
arguments named list of arguments to FUN

Author(s)
Ross Bennett
barplotGroupWeights 17

barplotGroupWeights barplot of group weights by group or category

Description

This function is called by [Link] function if [Link]="barplot"

Usage

barplotGroupWeights(object, ..., grouping = c("groups", "category"),

main = "Group Weights", las = 3, xlab = NULL, [Link] = 0.8,
[Link] = "darkgray", [Link] = 0.8)

Arguments

object object of class [Link]

... passthrough parameters to plot
grouping • groups: group the weights by group constraints
• category_labels: group the weights by category_labels in portfolio object
main an overall title for the plot: see title
las numeric in {0,1,2,3}; the style of axis labels
0: always parallel to the axis [default],
1: always horizontal,
2: always perpendicular to the axis,
3: always vertical.
xlab a title for the x axis: see title
[Link] The magnification to be used for x and y labels relative to the current setting of
cex
[Link] color for the default border and axis
[Link] The magnification to be used for x and y axis relative to the current setting of
cex

Author(s)

Ross Bennett
18 [Link]

[Link] Black Litterman Estimates

Description
Compute the Black Litterman estimate of moments for the posterior normal.

Usage
[Link](R, P, Mu = NULL, Sigma = NULL, Views = NULL)

Arguments
R returns
P a K x N pick matrix
Mu vector of length N of the prior expected values. The sample mean is used if
Mu=NULL.
Sigma an N x N matrix of the prior covariance matrix. The sample covariance is used
if Sigma=NULL.
Views a vector of length K of the views

Value
• BLMu: posterior expected values
• BLSigma: posterior covariance matrix

Note
This function is largely based on the work of Xavier Valls to port the matlab code of Attilio Meucci
to R as documented in the Meucci package.

Author(s)
Ross Bennett, Xavier Valls

References
A. Meucci - "Exercises in Advanced Risk and Portfolio Management" [Link]
170.

See Also
BlackLittermanFormula
BlackLittermanFormula 19

BlackLittermanFormula Computes the Black-Litterman formula for the moments of the poste-
rior normal.

Description

This function computes the Black-Litterman formula for the moments of the posterior normal, as
described in A. Meucci, "Risk and Asset Allocation", Springer, 2005.

Usage

BlackLittermanFormula(Mu, Sigma, P, v, Omega)

Arguments

Mu [vector] (N x 1) prior expected values.

Sigma [matrix] (N x N) prior covariance matrix.
P [matrix] (K x N) pick matrix.
v [vector] (K x 1) vector of views.
Omega [matrix] (K x K) matrix of confidence.

Value

BLMu [vector] (N x 1) posterior expected values.

BLSigma [matrix] (N x N) posterior covariance matrix.

Author(s)

Xavier Valls <flamejat@[Link]>

References

A. Meucci - "Exercises in Advanced Risk and Portfolio Management" [Link]

170.
See Meucci’s script for "BlackLittermanFormula.m"
20 box_constraint

box_constraint constructor for box_constraint.

Description

Box constraints specify the upper and lower bounds on the weights of the assets. This function is
called by [Link] when type="box" is specified. See [Link].

Usage

box_constraint(type = "box", assets, min, max, min_mult, max_mult,

enabled = TRUE, message = FALSE, ...)

Arguments

type character type of the constraint

assets number of assets, or optionally a named vector of assets specifying initial weights
min numeric or named vector specifying minimum weight box constraints
max numeric or named vector specifying minimum weight box constraints
min_mult numeric or named vector specifying minimum multiplier box constraint from
initial weight in assets
max_mult numeric or named vector specifying maximum multiplier box constraint from
initial weight in assets
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify box constraints

Value

an object of class ’box_constraint’

Author(s)

Ross Bennett

See Also

[Link]
[Link] 21

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

# defaults to min=0 and max=1

pspec <- [Link](pspec, type="box")

# specify box constraints as a scalar

pspec <- [Link](pspec, type="box", min=0.05, max=0.45)

# specify box constraints per asset

pspec <- [Link](pspec, type="box", min=c(0.05, 0.10, 0.08, 0.06),
max=c(0.45, 0.55, 0.35, 0.65))

[Link] compute comoments for use by lower level optimization functions

when the conditional covariance matrix is a CCC GARCH model

Description
it first estimates the conditional GARCH variances, then filters out the time-varying volatility and
estimates the higher order comoments on the innovations rescaled such that their unconditional
covariance matrix is the conditional covariance matrix forecast

Usage
[Link](R, momentargs = NULL, ...)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
momentargs list containing arguments to be passed down to lower level functions, default
NULL
... any other passthru parameters

center Center

Description
Center a matrix

Usage
center(x)
22 [Link]

Arguments
x matrix

Details
This function is used primarily to center a time series of asset returns or factors. Each column
should represent the returns of an asset or factor realizations. The expected value is taken as the
sample mean.
[Link] = x - mean(x)

Value
matrix of centered data

[Link] Buckets Centroid

Description
Compute the centroid for buckets of assets

Usage
[Link](buckets, simulations = 1000)

Arguments
buckets a list where each element contains the index of the assets in the respective
bucket. The assets within each bucket have no order. The bucket elements are
in ascending order such that R_bucket_1 < ... < R_bucket_n
simulations number of simulations

Details
A common use of buckets is to divide the assets into quartiles or deciles, but is generalized here for
an arbitrary number of buckets and arbitrary number of assets in each bucket.

Value
the centroid vector

Author(s)
Ross Bennett
[Link] 23

[Link] Complete Cases Centroid

Description
Numerical method to estimate complete cases centroid

Usage
[Link](order, simulations = 1000)

Arguments
order a vector of indexes of the relative ranking of expected asset returns in ascending
order. For example, order = c(2, 3, 1, 4) expresses a view on the expected
returns such that R_2 < R_3 < R_1 < R_4
simulations number of simulations

Value
the centroid vector

Author(s)
Ross Bennett

Examples
# Express a view on the assets such that
# R_2 < R_1 < R_3 < R_4
[Link](c(2, 1, 3, 4))

[Link] Multiple Sectors Centroid

Description
Compute the centroid for expressing views on the relative ranking of assets within sectors.

Usage
[Link](sectors, simulations = 1000)

Arguments
sectors a list where each list element contains the order of each asset in the given sector
simulations number of simulations
24 [Link]

Value
the centroid vector

Author(s)
Ross Bennett

Examples
# Express a view on the assets in two sectors
# Sector 1 View: R_2 < R_1 < R_3
# Sector 2 View: R_5 < R_4
x <- list()
x[[1]] <- c(2, 1, 3)
x[[2]] <- c(5, 4)
[Link](x)

[Link] Positive and Negative View Centroid

Description
Compute the centroid for expressing a view on assets with positive or negative expected returns

Usage
[Link](positive, negative, simulations = 1000)

Arguments
positive a vector of the index of assets with positive expected return in ascending order
negative a vector of the index of assets with negative expected return in ascending order.
simulations number of simulations

Value
the centroid vector

Author(s)
Ross Bennett

Examples
# Express a view that
# R_1 < R_2 < 0 < R_3 < R_4
[Link](c(1, 2), c(4, 3))
[Link] 25

[Link] Classic risk reward scatter and concentration

Description
This function charts the [Link] object in risk-return space and the degree of con-
centration based on the weights or percentage component contribution to risk.

Usage
[Link](object, ..., [Link] = "mean", [Link] = "ES",
[Link] = FALSE, [Link] = c("weights", "pct_contrib"),
col = [Link](20), [Link] = "darkgray", [Link] = 0.8,
xlim = NULL, ylim = NULL)

Arguments
object optimal portfolio created by [Link].
... any other passthru parameters.
[Link] string matching the objective of a ’return’ objective, on vertical axis.
[Link] string matching the objective of a ’risk’ objective, on horizontal axis.
[Link] TRUE/FALSE. Includes a risk reward scatter of the assets in the chart.
[Link] concentration type can be based on the concentration of weights or concentra-
tion of percentage component contribution to risk (only works with risk budget
objective for the optimization).
col color palette or vector of colors to use.
[Link] color for the border and axes.
[Link] The magnification to be used for axis annotation relative to the current setting
of cex.
xlim set the x-axis limit, same as in plot.
ylim set the y-axis limit, same as in plot.

Author(s)
Peter Carl and Ross Bennett

See Also
[Link]
26 [Link]

[Link] Chart weights along an efficient frontier

Description
This function produces a stacked barplot of weights along an efficient frontier.

Usage
[Link](object, ...)

## S3 method for class '[Link]'

[Link](object, ..., colorset = NULL,
[Link] = 25, [Link] = FALSE, [Link] = "ES", main = "",
[Link] = 0.8, [Link] = 0.8, [Link] = 0.8, [Link] = NULL,
[Link] = "darkgray", [Link] = "topright")

## S3 method for class '[Link]'

[Link](object, ..., colorset = NULL,
[Link] = 25, [Link] = FALSE, [Link] = "ES", main = "",
[Link] = 0.8, [Link] = 0.8, [Link] = 0.8, [Link] = NULL,
[Link] = "darkgray", [Link] = "topright")

Arguments
object object of class [Link] or [Link].
... passthru parameters to barplot.
colorset color palette or vector of colors to use.
[Link] number of portfolios to extract along the efficient frontier.
[Link] TRUE/FALSE. If TRUE, the group weights are charted.
[Link] string name of column to use for risk (horizontal axis). Must match the name of
an objective.
main title used in the plot.
[Link] the magnification to be used for x-axis and y-axis labels relative to the current
setting of ’cex’.
[Link] the magnification to be used for sizing the axis text relative to the current setting
of ’cex’, similar to plot.
[Link] the magnification to be used for sizing the legend relative to the current setting
of ’cex’, similar to plot.
[Link] character vector to use for the legend labels.
[Link] provides the color for drawing less-important chart elements, such as the box
lines, axis lines, etc.
[Link] NULL, "topright", "right", or "bottomright". If [Link] is NULL, the legend
will not be plotted.
[Link] 27

Author(s)
Ross Bennett

[Link]
Chart the efficient frontier and risk-return scatter

Description
Chart the efficient frontier and risk-return scatter of the assets for [Link] or [Link]
objects

Usage
[Link](object, ...)

## S3 method for class '[Link]'

[Link](object, ...,
[Link] = "ES", [Link] = 25, xlim = NULL, ylim = NULL,
[Link] = 0.8, [Link] = "darkgray", main = "Efficient Frontier",
[Link] = "SR", rf = 0, [Link] = TRUE, [Link] = 0.8,
[Link] = TRUE, [Link] = TRUE, [Link] = 21,
[Link] = 0.8)

## S3 method for class '[Link]'

[Link](object, ...,
[Link] = "ES", [Link] = 25, xlim = NULL, ylim = NULL,
[Link] = 0.8, [Link] = "darkgray", main = "Efficient Frontier",
[Link] = "SR", rf = 0, [Link] = TRUE, [Link] = 0.8,
[Link] = TRUE, [Link] = TRUE, [Link] = 21,
[Link] = 0.8)

## S3 method for class '[Link]'

[Link](object, ...,
[Link] = "ES", [Link] = NULL, xlim = NULL, ylim = NULL,
[Link] = 0.8, [Link] = "darkgray", main = "Efficient Frontier",
[Link] = "SR", rf = 0, [Link] = TRUE, [Link] = 0.8,
[Link] = TRUE, [Link] = TRUE, [Link] = 21,
[Link] = 0.8)

Arguments
object object to chart.
... passthru parameters to plot
[Link] string name of column to use for risk (horizontal axis). [Link] must match
the name of an objective measure in the objective_measures or opt_values
slot in the object created by [Link].
28 [Link]

[Link] number of portfolios to use to plot the efficient frontier.

xlim set the x-axis limit, same as in plot.
ylim set the y-axis limit, same as in plot.
[Link] numerical value giving the amount by which the axis should be magnified rela-
tive to the default.
[Link] provides the color for drawing less-important chart elements, such as the box
lines, axis lines, etc.
main a main title for the plot.
[Link] string name for risk adjusted return text to plot in the legend.
rf risk free rate. If rf is not null, the maximum Sharpe Ratio or modified Sharpe
Ratio tangency portfolio will be plotted.
[Link] TRUE/FALSE to plot the tangent line.
[Link] numerical value giving the amount by which the legend should be magnified
relative to the default.
[Link] TRUE/FALSE to include the assets.
[Link] TRUE/FALSE to include the asset names in the plot. [Link] must be
TRUE to plot asset names.
[Link] plotting character of the assets, same as in plot.
[Link] numerical value giving the amount by which the asset points and labels should
be magnified relative to the default.

Details
For objects created by [Link] with ’DEoptim’, ’random’, or ’pso’ specified as the opti-
mize_method:
• The efficient frontier plotted is based on the the trace information (sets of portfolios tested by
the solver at each iteration) in objects created by [Link].
For objects created by [Link] with ’ROI’ specified as the optimize_method:
• The mean-StdDev or mean-ETL efficient frontier can be plotted for optimal portfolio objects
created by [Link].
• If [Link]="StdDev", the mean-StdDev efficient frontier is plotted.
• If [Link]="ETL" (also "ES" or "CVaR"), the mean-ETL efficient frontier is plotted.
Note that trace=TRUE must be specified in [Link]
GenSA does not return any useable trace information for portfolios tested at each iteration, therfore
we cannot extract and chart an efficient frontier.
By default, the tangency portfolio (maximum Sharpe Ratio or modified Sharpe Ratio) will be plotted
using a risk free rate of 0. Set rf=NULL to omit this from the plot.

Author(s)
Ross Bennett
[Link] 29

[Link]
Plot multiple efficient frontiers

Description
Overlay the efficient frontiers of multiple portfolio objects on a single plot.

Usage
[Link](R, portfolio_list, type, [Link] = 25,
[Link] = "ES", search_size = 2000, main = "Efficient Frontiers",
[Link] = 0.8, [Link] = "darkgray", [Link] = NULL,
[Link] = NULL, [Link] = 0.8, xlim = NULL, ylim = NULL, ...,
[Link] = TRUE, [Link] = TRUE, [Link] = 21,
[Link] = 0.8, col = NULL, lty = NULL, lwd = NULL)

Arguments
R an xts object of asset returns
portfolio_list list of portfolio objects created by [Link] and combined with [Link]
type type of efficient frontier, see [Link]
[Link] number of portfolios to extract along the efficient frontier. This is only used for
objects of class [Link]
[Link] string name of column to use for risk (horizontal axis). Must match the name of
an objective.
search_size passed to [Link] for type="DEoptim" or type="random".
main title used in the plot.
[Link] the magnification to be used for sizing the axis text relative to the current setting
of ’cex’, similar to plot.
[Link] provides the color for drawing less-important chart elements, such as the box
lines, axis lines, etc.
[Link] location of the legend; NULL, "bottomright", "bottom", "bottomleft", "left",
"topleft", "top", "topright", "right" and "center".
[Link] character vector to use for the legend labels.
[Link] The magnification to be used for sizing the legend relative to the current setting
of ’cex’, similar to plot.
xlim set the x-axis limit, same as in plot.
ylim set the y-axis limit, same as in plot.
... passthrough parameters to plot.
[Link] TRUE/FALSE to include the assets.
[Link] TRUE/FALSE to include the asset names in the plot.
30 [Link]

[Link] plotting character of the assets, same as in plot.

[Link] A numerical value giving the amount by which the asset points and labels should
be magnified relative to the default.
col vector of colors with length equal to the number of portfolios in portfolio_list.
lty vector of line types with length equal to the number of portfolios in portfolio_list.
lwd vector of line widths with length equal to the number of portfolios in portfolio_list.

Author(s)
Ross Bennett

[Link] Chart weights by group or category

Description
Chart weights by group or category

Usage
[Link](object, ..., grouping = c("groups", "category"),
[Link] = "line", main = "Group Weights", las = 3, xlab = NULL,
[Link] = 0.8, [Link] = "darkgray", [Link] = 0.8)

Arguments
object object of class [Link].
... passthrough parameters to plot.
grouping • groups: group the weights by group constraints.
• category_labels: group the weights by category_labels in the portfolio
object.
[Link] "line" or "barplot".
main an overall title for the plot: see title.
las numeric in {0,1,2,3}; the style of axis labels
0: always parallel to the axis,
1: always horizontal,
2: always perpendicular to the axis,
3: always vertical[default].
xlab a title for the x axis: see title.
[Link] the magnification to be used for x and y labels relative to the current setting of
cex.
[Link] color for the default border and axis.
[Link] the magnification to be used for x and y axis relative to the current setting of
cex.
[Link] 31

Author(s)
Ross Bennett

[Link] Generic method to chart risk contribution

Description
This function is the generic method to chart risk budget objectives for [Link],
[Link], and [Link] objects. This function charts the contribu-
tion or percent contribution of the resulting objective measures of a risk_budget_objective. The
risk contributions for [Link] objects are plotted through time with
[Link].

Usage
[Link](object, ...)

## S3 method for class '[Link]'

[Link](object, ..., neighbors = NULL,
[Link] = "absolute", main = "Risk Contribution", ylab = "",
xlab = NULL, [Link] = 0.8, [Link] = 0.8,
[Link] = "darkgray", las = 3, ylim = NULL)

## S3 method for class '[Link]'

[Link](object, ...,
[Link] = "ES", [Link] = "absolute", regime = NULL,
main = "Risk Contribution")

## S3 method for class '[Link]'

[Link](object, ..., [Link] = "ES",
[Link] = "absolute", main = "Risk Budget", [Link] = "line",
[Link] = 0.8, [Link] = 0.8, [Link] = "darkgray", las = 3,
ylim = NULL, colorset = NULL, [Link] = NULL, [Link] = 0.8)

Arguments
object optimal portfolio object created by [Link] or [Link]
... any other passthru parameters to plot
neighbors risk contribution or pct_contrib of neighbor portfolios to be plotted, see Details.
[Link] string of risk column to match. The [Link] object may contain risk budgets
for ES or StdDev and this will match the proper column names of the objectives
list outp (e.g. [Link]).
[Link] "absolute" or "percentage" to plot risk contribution in absolute terms or percent-
age contribution.
32 [Link]

regime integer of the regime number. For use with [Link]

run with regime switching portfolios.
main main title for the chart.
[Link] "line" or "barplot".
ylab label for the y-axis.
xlab label for the x-axis.
[Link] the magnification to be used for axis annotation relative to the current setting of
cex.
[Link] the magnification to be used for axis annotation relative to the current setting of
cex.
[Link] provides the color for drawing less-important chart elements, such as the box
lines, axis lines, etc.
las numeric in {0,1,2,3}; the style of axis labels
0: always parallel to the axis [default],
1: always horizontal,
2: always perpendicular to the axis,
3: always vertical.
ylim set the y-axis limit, same as in plot
colorset color palette or vector of colors to use
[Link] [Link] NULL, "topright", "right", or "bottomright". If [Link] is NULL,
the legend will not be plotted
[Link] The magnification to be used for the legend relative to the current setting of cex

Details

neighbors may be specified in three ways. The first is as a single number of neighbors. This will
extract the neighbors closest to the portfolios in terms of the out numerical statistic. The second
method consists of a numeric vector for neighbors. This will extract the neighbors with portfolio
index numbers that correspond to the vector contents. The third method for specifying neighbors
is to pass in a matrix. This matrix should look like the output of extractStats, and should contain
properly named contribution and pct_contrib columns.

See Also

[Link] [Link] [Link]

[Link] 33

[Link] classic risk reward scatter

Description
This function charts the [Link] object in risk-return space.

Usage
[Link](object, ...)

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, [Link] = "mean", [Link] = "ES",
[Link] = FALSE, [Link] = "darkgray", [Link] = 0.8,
xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, [Link] = "mean", [Link] = "ES",
[Link] = FALSE, [Link] = "darkgray", [Link] = 0.8,
ylim = NULL, xlim = NULL, rp = FALSE)

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, [Link] = "mean", [Link] = "ES",
[Link] = FALSE, [Link] = "darkgray", [Link] = 0.8,
xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, [Link] = "mean", [Link] = "ES",
[Link] = FALSE, [Link] = "darkgray", [Link] = 0.8,
xlim = NULL, ylim = NULL, rp = FALSE)

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, [Link] = "mean", [Link] = "ES",
[Link] = FALSE, [Link] = "darkgray", [Link] = 0.8,
xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

[Link](object, ..., [Link] = "ES",
[Link] = "mean", main = "", ylim = NULL, xlim = NULL,
[Link] = TRUE, [Link] = FALSE, [Link] = 1,
[Link] = 0.8, [Link] = 0.8, [Link] = 0.8, colorset = NULL,
[Link] = "darkgray")
34 [Link]

Arguments

object optimal portfolio created by [Link].

neighbors set of ’neighbor’ portfolios to overplot, see Details.
... any other passthru parameters.
[Link] string matching the objective of a ’return’ objective, on vertical axis.
[Link] string matching the objective of a ’risk’ objective, on horizontal axis.
[Link] TRUE/FALSE. Includes a risk reward scatter of the assets in the chart.
[Link] color for the default plot scatter points.
[Link] The magnification to be used for axis annotation relative to the current setting
of cex.
xlim set the x-axis limit, same as in plot.
ylim set the y-axis limit, same as in plot.
rp TRUE/FALSE to generate random portfolios to plot the feasible space
main a main title for the plot.
[Link] TRUE/FALSE to include the names in the plot.
[Link] plotting character of the assets, same as in plot
[Link] numerical value giving the amount by which the asset points should be magni-
fied relative to the default.
[Link] numerical value giving the amount by which the labels should be magnified
relative to the default.
colorset color palette or vector of colors to use.

Details

neighbors may be specified in three ways. The first is as a single number of neighbors. This will
extract the neighbors closest portfolios in terms of the out numerical statistic. The second method
consists of a numeric vector for neighbors. This will extract the neighbors with portfolio index
numbers that correspond to the vector contents. The third method for specifying neighbors is to
pass in a matrix. This matrix should look like the output of extractStats, and should contain
[Link],[Link], and weights columns all properly named.

See Also

[Link]
[Link] 35

[Link] boxplot of the weights of the optimal portfolios

Description
This function charts the optimal weights of a portfolio run via [Link] or [Link].
The upper and lower bounds on weights can be plotted for single period optimizations. The opti-
mal weights will be charted through time for [Link] objects. For
[Link] objects, the weights are plotted with [Link].

Usage
[Link](object, ...)

## S3 method for class '[Link]'

[Link](object, ...,
main = "Weights")

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, main = "Weights", las = 3, xlab = NULL,
[Link] = 1, [Link] = "darkgray", [Link] = 0.8,
colorset = NULL, [Link] = "topright", [Link] = 0.8,
[Link] = "line")

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, main = "Weights", las = 3, xlab = NULL,
[Link] = 1, [Link] = "darkgray", [Link] = 0.8,
colorset = NULL, [Link] = "topright", [Link] = 0.8,
[Link] = "line")

## S3 method for class '[Link]'

[Link](object, ..., neighbors = NULL,
main = "Weights", las = 3, xlab = NULL, [Link] = 1,
[Link] = "darkgray", [Link] = 0.8, colorset = NULL,
[Link] = "topright", [Link] = 0.8, [Link] = "line")

## S3 method for class '[Link]'

[Link](object, ..., neighbors = NULL,
main = "Weights", las = 3, xlab = NULL, [Link] = 1,
[Link] = "darkgray", [Link] = 0.8, colorset = NULL,
[Link] = "topright", [Link] = 0.8, [Link] = "line")

## S3 method for class '[Link]'

[Link](object, ...,
neighbors = NULL, main = "Weights", las = 3, xlab = NULL,
36 [Link]

[Link] = 1, [Link] = "darkgray", [Link] = 0.8,

colorset = NULL, [Link] = "topright", [Link] = 0.8,
[Link] = "line")

## S3 method for class '[Link]'

[Link](object, neighbors = NULL, ...,
main = "Weights", las = 3, xlab = NULL, [Link] = 1,
[Link] = "darkgray", [Link] = 0.8, colorset = NULL,
[Link] = "topright", [Link] = 0.8, [Link] = "line")

Arguments

object optimal portfolio object created by [Link].

neighbors set of ’neighbor’ portfolios to overplot. See Details.
... any other passthru parameters .
main an overall title for the plot: see title
las numeric in {0,1,2,3}; the style of axis labels
0: always parallel to the axis,
1: always horizontal,
2: always perpendicular to the axis,
3: always vertical [default].
xlab a title for the x axis: see title
[Link] The magnification to be used for x and y labels relative to the current setting of
cex
[Link] provides the color for drawing less-important chart elements, such as the box
lines, axis lines, etc.
[Link] The magnification to be used for axis annotation relative to the current setting
of cex.
colorset color palette or vector of colors to use.
[Link] location of the legend. If NULL, the legend will not be plotted.
[Link] The magnification to be used for legend annotation relative to the current setting
of cex.
[Link] "line" or "barplot" to plot.

See Also

[Link] [Link] [Link]

check_constraints 37

check_constraints check if a set of weights satisfies the constraints

Description
This function checks if a set of weights satisfies all constraints. This is used as a helper function for
random portfolios created with rp_simplex and rp_grid to eliminate portfolios that do not satisfy
the constraints.

Usage
check_constraints(weights, portfolio)

Arguments
weights vector of weights
portfolio object of class ’portfolio’

Value
TRUE if all constraints are satisfied, FALSE if any constraint is violated

Author(s)
Ross Bennett

cokurtosisMF Cokurtosis Matrix Estimate

Description
Estimate cokurtosis matrix using a statistical factor model

Usage
cokurtosisMF(beta, stockM2, stockM4, factorM2, factorM4)

Arguments
beta (N x k) matrix of factor loadings (i.e. the betas) from a statistical factor model
stockM2 vector of length N of the 2nd moment of the model residuals
stockM4 vector of length N of the 4th moment of the model residuals
factorM2 (k x k) matrix of the 2nd moment of the factor realizations from a statistical
factor model
factorM4 (k x k^3) matrix of the 4th moment of the factor realizations from a statistical
factor model
38 cokurtosisSF

Details

This function estimates an (N x N^3) cokurtosis matrix from a statistical factor model with k factors,
where N is the number of assets.

Value

(N x N^3) cokurtosis matrix

cokurtosisSF Cokurtosis Matrix Estimate

Description

Estimate cokurtosis matrix using a single factor statistical factor model

Usage

cokurtosisSF(beta, stockM2, stockM4, factorM2, factorM4)

Arguments

beta vector of length N or (N x 1) matrix of factor loadings (i.e. the betas) from a
single factor statistical factor model
stockM2 vector of length N of the 2nd moment of the model residuals
stockM4 vector of length N of the 4th moment of the model residuals
factorM2 scalar of the 2nd moment of the factor realizations from a single factor statistical
factor model
factorM4 scalar of the 4th moment of the factor realizations from a single factor statistical
factor model

Details

This function estimates an (N x N^3) cokurtosis matrix from a statistical factor model with k factors,
where N is the number of assets.

Value

(N x N^3) cokurtosis matrix

[Link] 39

[Link] Combine objects created by [Link]

Description

This function takes a list of objects created by [Link] and sets the class name at-
tribute to ’[Link]’ for use in generic functions

Usage

[Link](x)

Arguments

x a list of objects created by [Link]

Value

an [Link] object

[Link] Combine a list of portfolio objects

Description

This function takes a list of objects created by [Link] and sets the class name attribute to
’[Link]’ for use in generic functions

Usage

[Link](x)

Arguments

x a list of objects created by [Link]

Value

a [Link] object
40 constrained_objective

constrained_objective calculate a numeric return value for a portfolio based on a set of con-
straints and objectives

Description
Function to calculate a numeric return value for a portfolio based on a set of constraints and objec-
tives. We’ll try to make as few assumptions as possible and only run objectives that are enabled by
the user.

Usage
constrained_objective_v1(w, R, constraints, ..., trace = FALSE,
normalize = TRUE, storage = FALSE)

constrained_objective_v2(w, R, portfolio, ..., trace = FALSE,

normalize = TRUE, storage = FALSE, env = NULL)

constrained_objective(w, R, portfolio, ..., trace = FALSE, normalize = TRUE,

storage = FALSE, env = NULL)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns.
w a vector of weights to test.
portfolio an object of class portfolio specifying the constraints and objectives for the
optimization, see portfolio.
... any other passthru parameters.
trace TRUE/FALSE whether to include debugging and additional detail in the output
list. The default is FALSE. Several charting functions require that trace=TRUE.
normalize TRUE/FALSE whether to normalize results to min/max sum (TRUE), or let the
optimizer penalize portfolios that do not conform (FALSE)
storage TRUE/FALSE default TRUE for DEoptim with trace, otherwise FALSE. not
typically user-called.
constraints a v1_constraint object for backwards compatibility with constrained_objective_v1.
env environment of moments calculated in [Link]

Details
If the user has passed in either min_sum or max_sum constraints for the portfolio, or both, and
are using a numerical optimization method like DEoptim, and normalize=TRUE, we’ll normalize
the weights passed in to whichever boundary condition has been violated. If using random portfo-
lios, all the portfolios generated will meet the constraints by construction. NOTE: this means that
the weights produced by a numeric optimization algorithm like DEoptim, pso, or GenSA might
constraint 41

violate constraints, and will need to be renormalized after optimizing. We apply the same normal-
ization in [Link] so that the weights you see have been normalized to min_sum if
the generated portfolio is smaller than min_sum or max_sum if the generated portfolio is larger
than max_sum. This normalization increases the speed of optimization and convergence by several
orders of magnitude in many cases.
You may find that for some portfolios, normalization is not desirable, if the algorithm cannot find
a direction in which to move to head towards an optimal portfolio. In these cases, it may be best
to set normalize=FALSE, and penalize the portfolios if the sum of the weighting vector lies outside
the min_sum and/or max_sum.
Whether or not we normalize the weights using min_sum and max_sum, and are using a numerical
optimization engine like DEoptim, we will penalize portfolios that violate weight constraints in
much the same way we penalize other constraints. If a min_sum/max_sum normalization has not
occurred, convergence can take a very long time. We currently do not allow for a non-normalized
full investment constraint. Future version of this function could include this additional constraint
penalty.
When you are optimizing a return objective, you must specify a negative multiplier for the return
objective so that the function will maximize return. If you specify a target return, any return that
deviates from your target will be penalized. If you do not specify a target return, you may need
to specify a negative VTR (value to reach) , or the function will not converge. Try the maximum
expected return times the multiplier (e.g. -1 or -10). Adding a return objective defaults the multiplier
to -1.
Additional parameters for other solvers (e.g. random portfolios or [Link] or pso or
GenSA may be passed in via . . .

Author(s)
Kris Boudt, Peter Carl, Brian G. Peterson, Ross Bennett

See Also
constraint, objective, [Link]

constraint constructor for class constraint

Description
This function is the constructor for the v1_constraint object for backwards compatibility.

Usage
constraint(assets = NULL, ..., min, max, min_mult, max_mult, min_sum = 0.99,
max_sum = 1.01, weight_seq = NULL)
42 constraint_ROI

Arguments
assets number of assets, or optionally a named vector of assets specifying initial weights
... any other passthru parameters
min numeric or named vector specifying minimum weight box constraints
max numeric or named vector specifying minimum weight box constraints
min_mult numeric or named vector specifying minimum multiplier box constraint from
initial weight in assets
max_mult numeric or named vector specifying maximum multiplier box constraint from
initial weight in assets
min_sum minimum sum of all asset weights, default .99
max_sum maximum sum of all asset weights, default 1.01
weight_seq seed sequence of weights, see generatesequence

Author(s)
Peter Carl, Brian G. Peterson

See Also
[Link]

Examples
exconstr <- constraint(assets=10, min_sum=1, max_sum=1, min=.01, max=.35,
weight_seq=generatesequence())

constraint_ROI constructor for class constraint_ROI

Description
constructor for class constraint_ROI

Usage
constraint_ROI(assets = NULL, [Link], solver = c("glpk", "quadprog"),
weight_seq = NULL)

Arguments
assets number of assets, or optionally a named vector of assets specifying seed weights
[Link] an object of type "OP" (optimization problem, of ROI) specifying the complete
optimization problem, see ROI help pages for proper construction of OP object.
solver string argument for what solver package to use, must have ROI plugin installed
for that solver. Currently support is for glpk and quadprog.
weight_seq seed sequence of weights, see generatesequence
constraint_v2 43

Author(s)
Hezky Varon

constraint_v2 constructor for v2 constraint specification

Description
See main documentation entry in [Link].

Usage
constraint_v2(type, enabled = TRUE, ..., constrclass = "v2_constraint")

Arguments
type character type of the constraint to add or update
enabled TRUE/FALSE to enabled the constraint
... any other passthru parameters
constrclass name of class for the constraint

coskewnessMF Coskewness Matrix Estimate

Description
Estimate coskewness matrix using a statistical factor model

Usage
coskewnessMF(beta, stockM3, factorM3)

Arguments
beta (N x k) matrix of factor loadings (i.e. the betas) from a statistical factor model
stockM3 vector of length N of the 3rd moment of the model residuals
factorM3 (k x k^2) matrix of the 3rd moment of the factor realizations from a statistical
factor model

Details
This function estimates an (N x N^2) coskewness matrix from a statistical factor model with k
factors, where N is the number of assets.

Value
(N x N^2) coskewness matrix
44 covarianceMF

coskewnessSF Coskewness Matrix Estimate

Description
Estimate coskewness matrix using a single factor statistical factor model

Usage
coskewnessSF(beta, stockM3, factorM3)

Arguments
beta vector of length N or (N x 1) matrix of factor loadings (i.e. the betas) from a
single factor statistical factor model
stockM3 vector of length N of the 3rd moment of the model residuals
factorM3 scalar of the 3rd moment of the factor realizations from a single factor statistical
factor model

Details
This function estimates an (N x N^2) coskewness matrix from a single factor statistical factor model
with k=1 factors, where N is the number of assets.

Value
(N x N^2) coskewness matrix

covarianceMF Covariance Matrix Estimate

Description
Estimate covariance matrix using a statistical factor model

Usage
covarianceMF(beta, stockM2, factorM2)

Arguments
beta (N x k) matrix of factor loadings (i.e. the betas) from a statistical factor model
stockM2 vector of length N of the variance (2nd moment) of the model residuals (i.e.
idiosyncratic variance of the stock)
factorM2 (k x k) matrix of the covariance (2nd moment) of the factor realizations from a
statistical factor model
covarianceSF 45

Details

This function estimates an (N x N) covariance matrix from a statistical factor model with k factors,
where N is the number of assets.

Value

(N x N) covariance matrix

covarianceSF Covariance Matrix Estimate

Description

Estimate covariance matrix using a single factor statistical factor model

Usage

covarianceSF(beta, stockM2, factorM2)

Arguments

beta vector of length N or (N x 1) matrix of factor loadings (i.e. the betas) from a
single factor statistical factor model
stockM2 vector of length N of the variance (2nd moment) of the model residuals (i.e.
idiosyncratic variance of the stock)
factorM2 scalar value of the 2nd moment of the factor realizations from a single factor
statistical factor model

Details

This function estimates an (N x N) covariance matrix from a single factor statistical factor model
with k=1 factors, where N is the number of assets.

Value

(N x N) covariance matrix
46 [Link]

[Link]
create an efficient frontier

Description
create an efficient frontier

Usage
[Link](R, portfolio, type, [Link] = 25,
risk_aversion = NULL, [Link] = "ES", search_size = 2000, ...)

Arguments
R xts object of asset returns
portfolio object of class ’portfolio’ specifying the constraints and objectives, see [Link].
type type of efficient frontier, see Details.
[Link] number of portfolios to calculate along the efficient frontier
risk_aversion vector of risk_aversion values to construct the efficient frontier. [Link]
is ignored if risk_aversion is specified and the number of points along the
efficient frontier will be equal to the length of risk_aversion.
[Link] column to match when extracting the efficient frontier from an objected created
by [Link].
search_size passed to [Link] for type="DEoptim" or type="random".
... passthrough parameters to [Link].

Details
Currently there are 4 ’types’ supported to create an efficient frontier:
• "mean-var", "mean-sd", or "mean-StdDev": This is a special case for an efficient frontier that
can be created by a QP solver. The portfolio object should have two objectives: 1) mean
and 2) var. If the portfolio object does not contain these objectives, they will be added using
default parameters. The efficient frontier will be created via [Link].
• "mean-ETL", "mean-ES", "mean-CVaR", "mean-etl": This is a special case for an efficient
frontier that can be created by an LP solver. The portfolio object should have two ob-
jectives: 1) mean and 2) ETL/ES/CVaR. If the portfolio object does not contain these ob-
jectives, they will be added using default parameters. The efficient frontier is created via
[Link].
• "DEoptim": This can handle more complex constraints and objectives than the simple mean-
var and mean-ETL cases. For this type, we actually call [Link] with optimize_method="DEoptim"
and then extract the efficient frontier with [Link].
• "random": This can handle more complex constraints and objectives than the simple mean-var
and mean-ETL cases. For this type, we actually call [Link] with optimize_method="random"
and then extract the efficient frontier with [Link].
diversification 47

Value
an object of class ’[Link]’ with the objective measures and weights of portfolios along the
efficient frontier.

Author(s)
Ross Bennett

See Also
[Link], [Link], [Link], [Link]

diversification Function to compute diversification as a constraint

Description
Diversification is defined as 1 minus the sum of the squared weights

diversif ication = 1 − sum(w2 )

Usage
diversification(weights)

Arguments
weights vector of asset weights

Author(s)
Ross Bennett

diversification_constraint
constructor for diversification_constraint

Description
The diversification constraint specifies a target diversification value. This function is called by
[Link] when type="diversification" is specified, see [Link]. Diversification is
computed as 1 - sum(weights^2).

Usage
diversification_constraint(type = "diversification", div_target = NULL,
enabled = TRUE, message = FALSE, ...)
48 EntropyProg

Arguments

type character type of the constraint

div_target diversification target value
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify diversification constraint an object of
class ’diversification_constraint’

Author(s)

Ross Bennett

See Also

[Link]

Examples

data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

pspec <- [Link](portfolio=pspec, type="diversification", div_target=0.7)

EntropyProg Entropy pooling program for blending views on scenarios with a prior
scenario-probability distribution

Description

Entropy program will change the initial predictive distribution ’p’ to a new set ’p_’ that satisfies
specified moment conditions but changes other propoerties of the new distribution the least by
minimizing the relative entropy between the two distributions. Theoretical note: Relative Entropy
(Kullback-Leibler information criterion KLIC) is an asymmetric measure.

Usage

EntropyProg(p, A = NULL, b = NULL, Aeq, beq, verbose = FALSE)

EntropyProg 49

Arguments
p a vector of initial probabilities based on prior (reference model, empirical distri-
bution, etc.). Sum of ’p’ must be 1
Aeq matrix consisting of equality constraints (paired with argument ’beq’). Denoted
as ’H’ in the Meucci paper. (denoted as ’H’ in the "Meucci - Flexible Views
Theory & Practice" paper formlua 86 on page 22)
beq vector corresponding to the matrix of equality constraints (paired with argument
’Aeq’). Denoted as ’h’ in the Meucci paper
A matrix consisting of inequality constraints (paired with argument ’b’). Denoted
as ’F’ in the Meucci paper
b vector consisting of inequality constraints (paired with matrix A). Denoted as
’f’ in the Meucci paper
verbose If TRUE, prints out additional information. Default FALSE.
’
J
X
` x, λ, ν ≡ x0 ln x −ln p +λ0 F x−f +ν 0 H









p̃ ≡ argminF x≤f,Hx≡h xj ln xj −ln pj
1

Details
We retrieve a new set of probabilities for the joint-scenarios using the Entropy pooling method Of
the many choices of ’p’ that satisfy the views, we choose ’p’ that minimize the entropy or distance
of the new probability distribution to the prior joint-scenario probabilities.
We use Kullback-Leibler divergence or relative entropy dist(p,q): Sum across all scenarios [ p-
t * ln( p-t / q-t ) ] Therefore we define solution as p* = argmin (choice of p ) [ sum across all
scenarios: p-t * ln( p-t / q-t) ], such that ’p’ satisfies views. The views modify the prior in a cohrent
manner (minimizing distortion) We forumulate the stress tests of the baseline scenarios as linear
constraints on yet-to-be defined probabilities Note that the numerical optimization acts on a very
limited number of variables equal to the number of views. It does not act directly on the very large
number of variables of interest, namely the probabilities of the Monte Carlo scenarios. This feature
guarantees the numerical feasability of entropy optimization.
Note that new probabilities are generated in much the same way that the state-price density modifies
objective probabilities of pay-offs to risk-neutral probabilities in contingent-claims asset pricing
Compute posterior (=change of measure) with Entropy Pooling, as described in

Value
a list with
• p_: revised probabilities based on entropy pooling
• optimizationPerformance: a list with status of optimization, value, number of iterations,
and sum of probabilities

Author(s)
Ram Ahluwalia <ram@[Link]>
50 [Link]

References

A. Meucci - "Fully Flexible Views: Theory and Practice". See page 22 for illustration of nu-
merical implementation Symmys site containing original MATLAB source code [Link]
[Link] NLOPT open-source optimization site containing background on algorithms http:
//[Link]/wiki/[Link]/NLopt We use the information-theoretic estimator of
Kitamur and Stutzer (1997). Reversing ’p’ and ’p_’ leads to the empirical likelihood" estimator
of Qin and Lawless (1994). See Robertson et al, "Forecasting Using Relative Entropy" (2002) for
more theory

[Link] Create an equal weight portfolio

Description

This function calculates objective measures for an equal weight portfolio.

Usage

[Link](R, portfolio, ...)

Arguments

R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type "portfolio" specifying the constraints and objectives for the
optimization
... any other passthru parameters to constrained_objective

Details

This function is simply a wrapper around constrained_objective to calculate the objective mea-
sures in the given portfolio object of an equal weight portfolio. The portfolio object should
include all objectives to be calculated.

Value

a list containing the returns, weights, objective measures, call, and portfolio object

Author(s)

Ross Bennett
etl_milp_opt 51

etl_milp_opt Minimum ETL MILP Optimization

Description

This function is called by [Link] to solve minimum ETL problems via mixed integer
linear programming.

Usage

etl_milp_opt(R, constraints, moments, target, alpha, solver = "glpk",

control = NULL)

Arguments

R xts object of asset returns

constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
target target return value
alpha alpha value for ETL/ES/CVaR
solver solver to use
control list of solver control parameters

Author(s)

Ross Bennett

etl_opt Minimum ETL LP Optimization

Description

This function is called by [Link] to solve minimum ETL problems.

Usage

etl_opt(R, constraints, moments, target, alpha, solver = "glpk",

control = NULL)
52 extractCokurtosis

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
target target return value
alpha alpha value for ETL/ES/CVaR
solver solver to use
control list of solver control parameters

Author(s)
Ross Bennett

extractCokurtosis Cokurtosis Estimate

Description
Extract the cokurtosis matrix estimate from a statistical factor model

Usage
extractCokurtosis(model, ...)

Arguments
model statistical factor model estimated via [Link]
... not currently used

Value
cokurtosis matrix estimate

Author(s)
Ross Bennett

See Also
[Link]
extractCoskewness 53

extractCoskewness Coskewness Estimate

Description
Extract the coskewness matrix estimate from a statistical factor model

Usage
extractCoskewness(model, ...)

Arguments
model statistical factor model estimated via [Link]
... not currently used

Value
coskewness matrix estimate

Author(s)
Ross Bennett

See Also
[Link]

extractCovariance Covariance Estimate

Description
Extract the covariance matrix estimate from a statistical factor model

Usage
extractCovariance(model, ...)

Arguments
model statistical factor model estimated via [Link]
... not currently used

Value
covariance matrix estimate
54 extractEfficientFrontier

Author(s)
Ross Bennett

See Also
[Link]

extractEfficientFrontier
Extract the efficient frontier data points

Description
This function extracts the efficient frontier from an object created by [Link].

Usage
extractEfficientFrontier(object, [Link] = "ES", [Link] = 25,
risk_aversion = NULL)

Arguments
object an optimal portfolio object created by [Link]
[Link] string name of column to use for risk (horizontal axis). [Link] must match
the name of an objective measure in the objective_measures or opt_values
slot in the object created by [Link].
[Link] number of portfolios to use to plot the efficient frontier
risk_aversion vector of risk_aversion values to construct the efficient frontier. [Link]
is ignored if risk_aversion is specified and the number of points along the
efficient frontier is equal to the length of risk_aversion.

Details
If the object is an [Link] object and [Link] is "ES", "ETL", or "CVaR",
then the mean-ETL efficient frontier will be created via [Link].
If the object is an [Link] object and [Link] is "StdDev", then the mean-
StdDev efficient frontier will be created via [Link]. Note that if ’var’ is
specified as the name of an objective, the value returned will be ’StdDev’.
For objects created by [Link] with the DEoptim, random, or pso solvers, the efficient
frontier will be extracted from the object via [Link]. This means that
[Link] must be run with trace=TRUE.

Value
an [Link] object with weights and other metrics along the efficient frontier
extractGroups 55

Author(s)
Ross Bennett

extractGroups Extract the group and/or category weights

Description
This function extracts the weights by group and/or category from an object of class [Link].
Group constraints or category_labels must be specified for this to return group constraints.

Usage
extractGroups(object, ...)

Arguments
object object of class [Link]
... passthrough parameters. Not currently used

Value
a list with two elements

• weights: Optimal set of weights from the [Link] object

• category_weights: Weights by category if category_labels are supplied in the portfolio ob-
ject
• group_weights: Weights by group if group is a constraint type

Author(s)
Ross Bennett

extractObjectiveMeasures
Extract the objective measures

Description
This function will extract the objective measures from the optimal portfolio run via [Link]

Usage
extractObjectiveMeasures(object)
56 extractStats

Arguments
object list returned by [Link]

Value
list of objective measures

Author(s)
Ross Bennett

See Also
[Link]

extractStats extract some stats and weights from a portfolio run via
[Link]

Description
This function will dispatch to the appropriate class handler based on the input class of the opti-
[Link] output object.

Usage
extractStats(object, prefix = NULL, ...)

Arguments
object list returned by [Link]
prefix prefix to add to output row names
... any other passthru parameters

Details
For [Link] objects:
In general, extractStats will extract the values objective measures and weights at each iteration
of a set of weights. This is the case for the DEoptim, random portfolios, and pso solvers that return
trace information. Note that trace=TRUE must be specified in [Link] to return the
trace information.
For [Link] objects, this function will extract the weights (swarm positions)
from the PSO output and the out values (swarm fitness values) for each iteration of the optimiza-
tion. This function can be slow because we need to run constrained_objective to calculate the
objective measures on the transformed weights.
For [Link] objects:
extractWeights 57

The extractStats function will return a list of the objective measures and weights at each rebal-
ance date for [Link] objects. The objective measures and weights of
each iteration or permutation will be returned if the optimization was done with DEoptim, random
portfolios, or pso. This could potentially result in a very large list object where each list element
has thousands of rows of at each rebalance period.
The output from the GenSA solver does not store weights evaluated at each iteration The GenSA
output for [Link] contains [Link], temperature, [Link], and [Link]

See Also
[Link]

extractWeights Extract weights from a portfolio run via [Link] or

[Link]

Description
This function will dispatch to the appropriate class handler based on the input class of the opti-
[Link] or [Link] output object

Usage
extractWeights(object, ...)

Arguments
object list returned by [Link]
... any other passthru parameters

See Also
[Link], [Link]

factor_exposure_constraint
Constructor for factor exposure constraint

Description
The factor exposure constraint sets upper and lower bounds on exposures to risk factors. This
function is called by [Link] when type="factor_exposure" is specified, see [Link]
58 factor_exposure_constraint

Usage

factor_exposure_constraint(type = "factor_exposure", assets, B, lower, upper,

enabled = TRUE, message = FALSE, ...)

Arguments

type character type of the constraint

assets named vector of assets specifying initial weights
B vector or matrix of risk factor exposures
lower vector of lower bounds of constraints for risk factor exposures
upper vector of upper bounds of constraints for risk factor exposures
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify risk factor exposure constraints

Details

B can be either a vector or matrix of risk factor exposures (i.e. betas). If B is a vector, the length of
B must be equal to the number of assets and lower and upper must be scalars. If B is passed in as a
vector, it will be converted to a matrix with one column.
If B is a matrix, the number of rows must be equal to the number of assets and the number of
columns represent the number of factors. The length of lower and upper must be equal to the
number of factors. The B matrix should have column names specifying the factors and row names
specifying the assets. Default column names and row names will be assigned if the user passes in a
B matrix without column names or row names.

Value

an object of class ’factor_exposure_constraint’

Author(s)

Ross Bennett

See Also

[Link]
fn_map 59

fn_map mapping function to transform or penalize weights that violate con-

straints

Description
The purpose of the mapping function is to transform a weights vector that does not meet all the
constraints into a weights vector that does meet the constraints, if one exists, hopefully with a
minimum of transformation.

Usage
fn_map(weights, portfolio, relax = FALSE, verbose = FALSE, ...)

Arguments
weights vector of weights
portfolio object of class portfolio
relax TRUE/FALSE, default FALSE. Enable constraints to be relaxed.
verbose print error messages for debuggin purposes
... any other passthru parameters

Details
The first step is to test for violation of the constraint. If the constraint is violated, we will apply a
transformation such that the weights vector satisfies the constraints. The following constraint types
are tested in the mapping function: leverage, box, group, and position limit. The transformation
logic is based on code from the random portfolio sample method.
If relax=TRUE, we will attempt to relax the constraints if a feasible portfolio could not be formed
with an initial call to rp_transform. We will attempt to relax the constraints up to 5 times. If
we do not have a feasible portfolio after attempting to relax the constraints, then we will default to
returning the weights vector that violates the constraints.

Value
• weights: vector of transformed weights meeting constraints.
• min: vector of min box constraints that may have been modified if relax=TRUE.
• max: vector of max box constraints that may have been modified if relax=TRUE.
• cLO: vector of lower bound group constraints that may have been modified if relax=TRUE.
• cUP: vector of upper bound group constraints that may have been modified if relax=TRUE.

Author(s)
Ross Bennett
60 get_constraints

generatesequence create a sequence of possible weights for random or brute force port-
folios

Description
This function creates the sequence of min<->max weights for use by random or brute force opti-
mization engines.

Usage
generatesequence(min = 0.01, max = 1, by = min/max, rounding = 3)

Arguments
min minimum value of the sequence
max maximum value of the sequence
by number to increment the sequence by
rounding integrer how many decimals should we round to

Details
The sequence created is not constrained by asset.

Author(s)
Peter Carl, Brian G. Peterson

See Also
constraint, objective

get_constraints Helper function to get the enabled constraints out of the portfolio ob-
ject

Description
When the v1_constraint object is instantiated via constraint, the arguments min_sum, max_sum,
min, and max are either specified by the user or default values are assigned. These are required
by other functions such as [Link] and constrained_objective . This function
will check that these variables are in the portfolio object in the constraints list. We will default to
min_sum=1 and max_sum=1 if leverage constraints are not specified. We will default to min=-Inf
and max=Inf if box constraints are not specified. This function is used at the beginning of opti-
[Link] and other functions to extract the constraints from the portfolio object. We Use the
same naming as the v1_constraint object.
gmv_opt 61

Usage
get_constraints(portfolio)

Arguments
portfolio an object of class ’portfolio’

Value
an object of class ’constraint’ which is a flattened list of enabled constraints

Author(s)
Ross Bennett

See Also
[Link]

gmv_opt GMV/QU QP Optimization

Description
This function is called by [Link] to solve minimum variance or maximum quadratic
utility problems

Usage
gmv_opt(R, constraints, moments, lambda, target, lambda_hhi, conc_groups,
solver = "quadprog", control = NULL)

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
lambda risk_aversion parameter
target target return value
lambda_hhi concentration aversion parameter
conc_groups list of vectors specifying the groups of the assets.
solver solver to use
control list of solver control parameters

Author(s)
Ross Bennett
62 gmv_opt_ptc

gmv_opt_leverage GMV/QU QP Optimization with Turnover Constraint

Description
This function is called by [Link] to solve minimum variance or maximum quadratic
utility problems with a leverage constraint

Usage
gmv_opt_leverage(R, constraints, moments, lambda, target, solver = "quadprog",
control = NULL)

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
lambda risk_aversion parameter
target target return value
solver solver to use
control list of solver control parameters

Author(s)
Ross Bennett

gmv_opt_ptc GMV/QU QP Optimization with Proportional Transaction Cost Con-

straint

Description
This function is called by [Link] to solve minimum variance or maximum quadratic
utility problems with proportional transaction cost constraint

Usage
gmv_opt_ptc(R, constraints, moments, lambda, target, init_weights,
solver = "quadprog", control = NULL)
gmv_opt_toc 63

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
lambda risk_aversion parameter
target target return value
init_weights initial weights to compute turnover
solver solver to use
control list of solver control parameters

Author(s)
Ross Bennett

gmv_opt_toc GMV/QU QP Optimization with Turnover Constraint

Description
This function is called by [Link] to solve minimum variance or maximum quadratic
utility problems with turnover constraint

Usage
gmv_opt_toc(R, constraints, moments, lambda, target, init_weights,
solver = "quadprog", control = NULL)

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
lambda risk_aversion parameter
target target return value
init_weights initial weights to compute turnover
solver solver to use
control list of solver control parameters

Author(s)
Ross Bennett
64 group_constraint

group_constraint constructor for group_constraint

Description

Group constraints specify the grouping of the assets, weights of the groups, and number of postions
(i.e. non-zero weights) iof the groups. This function is called by [Link] when type="group"
is specified. see [Link]

Usage

group_constraint(type = "group", assets, groups, group_labels = NULL,

group_min, group_max, group_pos = NULL, enabled = TRUE, message = FALSE,
...)

Arguments

type character type of the constraint

assets number of assets, or optionally a named vector of assets specifying initial weights
groups list of vectors specifying the groups of the assets
group_labels character vector to label the groups (e.g. size, asset class, style, etc.)
group_min numeric or vector specifying minimum weight group constraints
group_max numeric or vector specifying minimum weight group constraints
group_pos vector specifying the number of non-zero weights per group
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify group constraints

Value

an object of class ’group_constraint’

Author(s)

Ross Bennett

See Also

[Link]
group_fail 65

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

# Assets 1 and 3 are groupA

# Assets 2 and 4 are groupB
pspec <- [Link](portfolio=pspec,
type="group",
groups=list(groupA=c(1, 3),
groupB=c(2, 4)),
group_min=c(0.15, 0.25),
group_max=c(0.65, 0.55))

# 2 levels of grouping (e.g. by sector and geography)

pspec <- [Link](assets=5)
# Assets 1, 3, and 5 are Tech
# Assets 2 and 4 are Oil
# Assets 2, 4, and 5 are UK
# Assets 1 and are are US
group_list <- list(group1=c(1, 3, 5),
group2=c(2, 4),
groupA=c(2, 4, 5),
groupB=c(1, 3))

pspec <- [Link](portfolio=pspec,

type="group",
groups=group_list,
group_min=c(0.15, 0.25, 0.2, 0.1),
group_max=c(0.65, 0.55, 0.5, 0.4))

group_fail Test if group constraints have been violated

Description
The function loops through each group and tests if cLO or cUP have been violated for the given
group. This is a helper function for rp_transform.

Usage
group_fail(weights, groups, cLO, cUP, group_pos = NULL)

Arguments
weights weights vector to test
groups list of vectors specifying the groups of the assets
cLO numeric or vector specifying minimum weight group constraints
66 indexes

cUP numeric or vector specifying minimum weight group constraints

group_pos vector specifying the number of non-zero weights per group

Value
logical vector: TRUE if group constraints are violated for a given group

Author(s)
Ross Bennett

HHI Concentration of weights

Description
This function computes the concentration of weights using the Herfindahl Hirschman Index

Usage
HHI(weights, groups = NULL)

Arguments
weights set of portfolio weights
groups list of vectors of grouping

Author(s)
Ross Bennett

indexes Six Major Economic Indexes

Description
Monthly data of five indexes beginning on 2000-01-31 and ending 2009-12-31. The indexes are:
US Bonds, US Equities, International Equities, Commodities, US T-Bills, and Inflation

Usage
data(indexes)

Format
CSV converted into xts object with montly observations
insert_constraints 67

Examples
data(indexes)

#preview the data

head(indexes)

#summary period statistics

summary(indexes)

insert_constraints Insert a list of constraints into the constraints slot of a portfolio object

Description
This is a helper function primarily for backwards compatibility to insert constraints from a ’v1_constraint’
object into the v2 ’portfolio’ object.

Usage
insert_constraints(portfolio, constraints)

Arguments
portfolio object of class ’portfolio’
constraints list of constraint objects

Author(s)
Ross Bennett

insert_objectives Insert a list of objectives into the objectives slot of a portfolio object

Description
This is a helper function primarily for backwards compatibility to insert objectives from a ’v1_constraint’
object into the v2 ’portfolio’ object.

Usage
insert_objectives(portfolio, objectives)

Arguments
portfolio object of class ’portfolio’
objectives list of objective objects
68 [Link]

Author(s)

Ross Bennett

[Link]
Create an inverse volatility weighted portfolio

Description

This function calculates objective measures for an equal weight portfolio.

Usage

[Link](R, portfolio, ...)

Arguments

R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type "portfolio" specifying the constraints and objectives for the
optimization
... any other passthru parameters to constrained_objective

Details

This function is simply a wrapper around constrained_objective to calculate the objective mea-
sures in the given portfolio object of an inverse volatility weight portfolio. The portfolio object
should include all objectives to be calculated.

Value

a list containing the returns, weights, objective measures, call, and portfolio object

Author(s)

Peter Carl
[Link] 69

[Link] check function for constraints

Description

check function for constraints

Usage

[Link](x)

Arguments

x object to test for type constraint

Author(s)

bpeterson

[Link] check class of an objective object

Description

check class of an objective object

Usage

[Link](x)

Arguments

x an object potentially of type ’objective’ to test

Author(s)

Brian G. Peterson
70 leverage_exposure_constraint

[Link] check function for portfolio

Description
check function for portfolio

Usage
[Link](x)

Arguments
x object to test for type portfolio

Author(s)
Ross Bennett

leverage_exposure_constraint
constructor for leverage_exposure_constraint

Description
The leverage_exposure constraint specifies a maximum leverage where leverage is defined as the
sum of the absolute value of the weights. Leverage exposure is computed as the sum of the absolute
value of the weights, sum(abs(weights)).

Usage
leverage_exposure_constraint(type = "leverage_exposure", leverage = NULL,
enabled = TRUE, message = FALSE, ...)

Arguments
type character type of the constraint
leverage maximum leverage value
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify diversification constraint an object of
class ’diversification_constraint’
maxret_milp_opt 71

Details
This should be used for constructing, for example, 130/30 portfolios or dollar neutral portfolios
with 2:1 leverage. For the ROI solvers, this is implemented as a MILP problem and is not supported
for problems formulated as a quadratic programming problem. This may change in the future if a
MIQP solver is added.
This function is called by [Link] when type="leverage_exposure" is specified, see [Link].

Author(s)
Ross Bennett

See Also
[Link]

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

pspec <- [Link](portfolio=pspec, type="leverage_exposure", leverage=1.6)

maxret_milp_opt Maximum Return MILP Optimization

Description
This function is called by [Link] to solve maximum return problems via mixed integer
linear programming.

Usage
maxret_milp_opt(R, constraints, moments, target, solver = "glpk",
control = NULL)

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
target target return value
solver solver to use
control list of solver control parameters
72 [Link]

Author(s)
Ross Bennett

maxret_opt Maximum Return LP Optimization

Description
This function is called by [Link] to solve maximum return

Usage
maxret_opt(R, moments, constraints, target, solver = "glpk", control = NULL)

Arguments
R xts object of asset returns
constraints object of constraints in the portfolio object extracted with get_constraints
moments object of moments computed based on objective functions
target target return value
solver solver to use
control list of solver control parameters

Author(s)
Ross Bennett

[Link]
Generate the efficient frontier for a mean-etl portfolio

Description
This function generates the mean-ETL efficient frontier of a portfolio specifying the constraints
and objectives. The portfolio object should have two objectives: 1) mean and 2) ES (or ETL or
cVaR). If the portfolio object does not contain these objectives, they will be added using default
parameters.

Usage
[Link](portfolio, R, [Link] = 25, ...)
[Link] 73

Arguments
portfolio a portfolio object with constraints and objectives created via [Link]
R an xts or matrix of asset returns
[Link] number of portfolios to generate the efficient frontier
... passthru parameters to [Link]

Value
a matrix of objective measure values and weights along the efficient frontier

Author(s)
Ross Bennett

[Link]
Generate the efficient frontier for a mean-variance portfolio

Description
This function generates the mean-variance efficient frontier of a portfolio specifying the constraints
and objectives. The portfolio object should have two objectives: 1) mean and 2) var (or sd or
StdDev). If the portfolio object does not contain these objectives, they will be added using default
parameters.

Usage
[Link](portfolio, R, [Link] = 25,
risk_aversion = NULL, ...)

Arguments
portfolio a portfolio object with constraints created via [Link]
R an xts or matrix of asset returns
[Link] number of portfolios to plot along the efficient frontier
risk_aversion vector of risk_aversion values to construct the efficient frontier. [Link]
is ignored if risk_aversion is specified and the number of points along the
efficient frontier is equal to the length of risk_aversion.
... passthru parameters to [Link]

Value
a matrix of objective measure values and weights along the efficient frontier

Author(s)
Ross Bennett
74 [Link]

[Link] Compute moments

Description
Compute the first and second moments using the Fully Flexible Views framework as described in
A. Meucci - "Fully Flexible Views: Theory and Practice".

Usage
[Link](R, posterior_p)

Arguments
R xts object of asset returns
posterior_p vector of posterior probabilities

Value
a list with the first and second moments

• mu: vector of expected returns

• sigma: covariance matrix

Author(s)
Ross Bennett

References
A. Meucci - "Fully Flexible Views: Theory and Practice".

[Link] Asset Ranking

Description
Express views on the relative expected asset returns as in A. Meucci, "Fully Flexible Views: Theory
and Practice" and compute the first and second moments.

Usage
[Link](R, p, order)
minmax_objective 75

Arguments
R xts object of asset returns
p a vector of the prior probability values
order a vector of indexes of the relative ranking of expected asset returns in ascending
order. For example, order = c(2, 3, 1, 4) means that the expected returns
of R[,2] < R[,3], < R[,1] < R[,4].

Value
The estimated moments based on ranking views

Note
This function is based on the ViewRanking function written by Ram Ahluwalia in the Meucci
package.

References
A. Meucci, "Fully Flexible Views: Theory and Practice" [Link] See
Meucci script for "RankingInformation/ViewRanking.m"

See Also
[Link]

Examples
data(edhec)
R <- edhec[,1:4]
p <- rep(1 / nrow(R), nrow(R))
[Link](R, p, c(2, 3, 1, 4))

minmax_objective constructor for class tmp_minmax_objective

Description
This objective allows for min and max targets to be specified.

Usage
minmax_objective(name, target = NULL, arguments = NULL, multiplier = 1,
enabled = TRUE, ..., min, max)
76 [Link]

Arguments
name name of the objective, should correspond to a function, though we will try to
make allowances
target univariate target for the objective
min minimum value
max maximum value
arguments default arguments to be passed to an objective function when executed
multiplier multiplier to apply to the objective, usually 1 or -1
enabled TRUE/FALSE
... any other passthru parameters

Details
If target is set, we’ll try to meet the metric
If target is NULL and min and max are specified, then do the following:
If max is violated to the upside, penalize the metric. If min is violated to the downside, penalize the
metric. The purpose of this objective is to try to meet the range between min and max

Value
object of class ’minmax_objective’

Author(s)
Ross Bennett

[Link] Multple Layer Portfolio Specification

Description
Create and specify a multiple layer portfolio

Usage
[Link](portfolio, levels = 2, ...)

Arguments
portfolio the "top level" portfolio
levels number of levels of sub-portfolios
... any additional parameters
[Link] 77

Details
The [Link] slot is a list where each element contains the portfolio object and rebalancing
parameters for the optimization of the sub portfolio. This allows, for example, each sub portfolio to
have different rebalancing frequencies (i.e. monthly or quarterly), optimization methods, etc.
Each sub portfolio is optimized with [Link] to create a time series of
proxy returns.
The "top level" portfolio is used to specify the constraints and objectives to control the optimization
given the proxy returns of each sub portfolio.

Value
a [Link] object with the top level portfolio and sub portfolios with optimization
parameters for each sub portfolio

Author(s)
Ross Bennett

[Link] utility function to replace awkward named from unlist

Description
utility function to replace awkward named from unlist

Usage
[Link](rnames)

Arguments
rnames character vector of names to check for cleanup

objective constructor for class ’objective’

Description
Typically called as a sub-function by the user function [Link]. See main documentation
there.

Usage
objective(name, target = NULL, arguments, enabled = TRUE, ...,
multiplier = 1, objclass = "objective")
78 [Link]

Arguments

name name of the objective which will be used to call a function, like ’ES’, ’VaR’,
’mean’
target univariate target for the objective, default NULL
arguments default arguments to be passed to an objective function when executed
enabled TRUE/FALSE
... any other passthrough parameters
multiplier multiplier to apply to the objective, usually 1 or -1
objclass string class to apply, default ’objective’

Author(s)

Brian G. Peterson

See Also

[Link], [Link]

[Link] Constrained optimization of portfolios

Description

This function aims to provide a wrapper for constrained optimization of portfolios that specify
constraints and objectives.

Usage

optimize.portfolio_v1(R, constraints, optimize_method = c("DEoptim", "random",

"ROI", "ROI_old", "pso", "GenSA"), search_size = 20000, trace = FALSE,
..., rp = NULL, momentFUN = "[Link].moments_v1")

optimize.portfolio_v2(R, portfolio = NULL, constraints = NULL,

objectives = NULL, optimize_method = c("DEoptim", "random", "ROI", "pso",
"GenSA"), search_size = 20000, trace = FALSE, ..., rp = NULL,
momentFUN = "[Link]", message = FALSE)

[Link](R, portfolio = NULL, constraints = NULL,

objectives = NULL, optimize_method = c("DEoptim", "random", "ROI", "pso",
"GenSA"), search_size = 20000, trace = FALSE, ..., rp = NULL,
momentFUN = "[Link]", message = FALSE)
[Link] 79

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type "portfolio" specifying the constraints and objectives for the
optimization
constraints default=NULL, a list of constraint objects. An object of class ’v1_constraint’
can be passed in here.
objectives default=NULL, a list of objective objects.
optimize_method
one of "DEoptim", "random", "ROI", "pso", "GenSA". A solver for ROI can
also be specified and will be solved using ROI. See Details.
search_size integer, how many portfolios to test, default 20,000
trace TRUE/FALSE if TRUE will attempt to return additional information on the path
or portfolios searched
... any other passthru parameters
rp matrix of random portfolio weights, default NULL, mostly for automated use
by rebalancing optimization or repeated tests on same portfolios
momentFUN the name of a function to call to set portfolio moments, default [Link].moments_v2
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.

Details
This function currently supports DEoptim, random portfolios, pso, GenSA, and ROI as back ends.
Additional back end contributions for Rmetrics, ghyp, etc. would be welcome.
When using random portfolios, search_size is precisely that, how many portfolios to test. You need
to make sure to set your feasible weights in generatesequence to make sure you have search_size
unique portfolios to test, typically by manipulating the ’by’ parameter to select something smaller
than .01 (I often use .002, as .001 seems like overkill)
When using DE, search_size is decomposed into two other parameters which it interacts with, NP
and itermax.
NP, the number of members in each population, is set to cap at 2000 in DEoptim, and by default is
the number of parameters (assets/weights) * 10.
itermax, if not passed in dots, defaults to the number of parameters (assets/weights) * 50.
When using GenSA and want to set verbose=TRUE, instead use trace.
If optimize_method="ROI" is specified, a default solver will be selected based on the optimiza-
tion problem. The glpk solver is the default solver for LP and MILP optimization problems. The
quadprog solver is the default solver for QP optimization problems. For example, optimize_method = "quadprog"
can be specified and the optimization problem will be solved via ROI using the quadprog solver.
The extension to ROI solves a limited type of convex optimization problems:
• Maxmimize portfolio return subject leverage, box, group, position limit, target mean return,
and/or factor exposure constraints on weights.
• Minimize portfolio variance subject to leverage, box, group, turnover, and/or factor exposure
constraints (otherwise known as global minimum variance portfolio).
80 [Link]

• Minimize portfolio variance subject to leverage, box, group, and/or factor exposure constraints
and a desired portfolio return.
• Maximize quadratic utility subject to leverage, box, group, target mean return, turnover, and/or
factor exposure constraints and risk aversion parameter. (The risk aversion parameter is passed
into [Link] as an added argument to the portfolio object).
• Maximize portfolio mean return per unit standard deviation (i.e. the Sharpe Ratio) can be done
by specifying maxSR=TRUE in [Link]. If both mean and StdDev are specified
as objective names, the default action is to maximize quadratic utility, therefore maxSR=TRUE
must be specified to maximize Sharpe Ratio.
• Minimize portfolio ES/ETL/CVaR optimization subject to leverage, box, group, position limit,
target mean return, and/or factor exposure constraints and target portfolio return.
• Maximize portfolio mean return per unit ES/ETL/CVaR (i.e. the STARR Ratio) can be done
by specifying maxSTARR=TRUE in [Link]. If both mean and ES/ETL/CVaR
are specified as objective names, the default action is to maximize mean return per unit
ES/ETL/CVaR.

These problems also support a weight_concentration objective where concentration of weights as

measured by HHI is added as a penalty term to the quadratic objective.
Because these convex optimization problem are standardized, there is no need for a penalty term.
The multiplier argument in [Link] passed into the complete constraint object are ing-
nored by the ROI solver.

Value
a list containing the following elements

• weights: The optimal set weights.

• objective_measures: A list containing the value of each objective corresponding to the
optimal weights.
• opt_values: A list containing the value of each objective corresponding to the optimal
weights.
• out: The output of the solver.
• call: The function call.
• portfolio: The portfolio object.
• R: The asset returns.
• data summary: The first row and last row of R.
• elapsed_time: The amount of time that elapses while the optimization is run.
• end_t: The date and time the optimization completed.

When Trace=TRUE is specified, the following elements will be returned in addition to the elements
above. The output depends on the optimization method and is specific to each solver. Refer to the
documentation of the desired solver for more information.
optimize_method="random"

• random_portfolios: A matrix of the random portfolios.

[Link] 81

• random_portfolio_objective_results: A list of the following elements for each random

portfolio.
– out: The output value of the solver corresponding to the random portfolio weights.
– weights: The weights of the random portfolio.
– objective_measures: A list of each objective measure corresponding to the random
portfolio weights.
optimize_method="DEoptim"
• DEoutput: A list (of length 2) containing the following elements:
– optim
– member
• DEoptim_objective_results: A list containing the following elements for each intermedi-
ate population.
– out: The output of the solver.
– weights: Population weights.
– init_weights: Initial population weights.
– objective_measures: A list of each objective measure corresponding to the weights
optimize_method="pso"
• PSOoutput: A list containing the following elements:
– par
– value
– counts
– convergence
– message
– stats
optimize_method="GenSA"
• GenSAoutput: A list containing the following elements:
– value
– par
– [Link]
– counts

Note
An object of class v1_constraint can be passed in for the constraints argument. The v1_constraint
object was used in the previous ’v1’ specification to specify the constraints and objectives for the
optimization problem, see constraint. We will attempt to detect if the object passed into the
constraints argument is a v1_constraint object and update to the ’v2’ specification by adding the
constraints and objectives to the portfolio object.

Author(s)
Kris Boudt, Peter Carl, Brian G. Peterson, Ross Bennett
82 [Link]

See Also
[Link]

[Link]
Execute multiple [Link] calls, presumably in parallel

Description
This function will not speed up optimization!

Usage
[Link](R, portfolio, optimize_method = c("DEoptim",
"random", "ROI", "pso", "GenSA"), search_size = 20000, trace = FALSE, ...,
rp = NULL, momentFUN = "[Link]", message = FALSE,
nodes = 4)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type "portfolio" specifying the constraints and objectives for the
optimization
optimize_method
one of "DEoptim", "random", "pso", "GenSA".
search_size integer, how many portfolios to test, default 20,000
trace TRUE/FALSE if TRUE will attempt to return additional information on the path
or portfolios searched
... any other passthru parameters
rp matrix of random portfolio weights, default NULL, mostly for automated use
by rebalancing optimization or repeated tests on same portfolios
momentFUN the name of a function to call to set portfolio moments, default [Link].moments_v2
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
nodes how many processes to run in the foreach loop, default 4

Details
This function exists to run multiple copies of [Link], presumabley in parallel using
foreach.
This is typically done to test your parameter settings, specifically total population size, but also
possibly to help tune your convergence settings, number of generations, stopping criteria, etc.
If you want to use all the cores on your multi-core computer, use the parallel version of the apppro-
priate optimization engine, not this function.
[Link] 83

Value
a list containing the optimal weights, some summary statistics, the function call, and optionally
trace information

Author(s)
Kris Boudt, Peter Carl, Brian G. Peterson

[Link]
Portfolio Optimization with Rebalancing Periods

Description
Portfolio optimization with support for rebalancing periods for out-of-sample testing (i.e. backtest-
ing)

Usage
[Link].rebalancing_v1(R, constraints,
optimize_method = c("DEoptim", "random", "ROI"), search_size = 20000,
trace = FALSE, ..., rp = NULL, rebalance_on = NULL,
training_period = NULL, rolling_window = NULL)

[Link](R, portfolio = NULL, constraints = NULL,

objectives = NULL, optimize_method = c("DEoptim", "random", "ROI"),
search_size = 20000, trace = FALSE, ..., rp = NULL,
rebalance_on = NULL, training_period = NULL, rolling_window = NULL)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type "portfolio" specifying the constraints and objectives for the
optimization
constraints default NULL, a list of constraint objects
objectives default NULL, a list of objective objects
optimize_method
one of "DEoptim", "random", "pso", "GenSA", or "ROI"
search_size integer, how many portfolios to test, default 20,000
trace TRUE/FALSE if TRUE will attempt to return additional information on the path
or portfolios searched
... any other passthru parameters to [Link]
rp a set of random portfolios passed into the function to prevent recalculation
rebalance_on character string of period to rebalance on. See endpoints for valid names.
84 [Link]

training_period
an integer of the number of periods to use as a training data in the front of the
returns data
rolling_window an integer of the width (i.e. number of periods) of the rolling window, the default
of NULL will run the optimization using the data from inception.

Details
Run portfolio optimization with periodic rebalancing at specified time periods. Running the portfo-
lio optimization with periodic rebalancing can help refine the constraints and objectives by evaluat-
ing the out of sample performance of the portfolio based on historical data
This function is a essentially a wrapper around [Link] and thus the discussion in the
Details section of the [Link] help file is valid here as well.
This function is massively parallel and requires the ’foreach’ package. It is suggested to register a
parallel backend.

Value
a list containing the following elements

• portfolio: The portfolio object.

• R: The asset returns.
• call: The function call.
• elapsed_time: The amount of time that elapses while the optimization is run.
• opt_rebalancing: A list of [Link] objects computed at each rebalancing
period.

Author(s)
Kris Boudt, Peter Carl, Brian G. Peterson

See Also
[Link] [Link]

Examples
## Not run:
data(edhec)
R <- edhec[,1:4]
funds <- colnames(R)

portf <- [Link](funds)

portf <- [Link](portf, type="full_investment")
portf <- [Link](portf, type="long_only")
portf <- [Link](portf, type="risk", name="StdDev")

# Quarterly rebalancing with 5 year training period

bt.opt1 <- [Link](R, portf,
[Link] 85

optimize_method="ROI",
rebalance_on="quarters",
training_period=60)

# Monthly rebalancing with 5 year training period and 4 year rolling window
bt.opt2 <- [Link](R, portf,
optimize_method="ROI",
rebalance_on="months",
training_period=60,
rolling_window=48)

## End(Not run)

[Link]
plot method for objects of class [Link]

Description
Scatter and weights chart for portfolio optimizations run with trace=TRUE

Usage
## S3 method for class '[Link]'
plot(x, ..., [Link] = "mean",
[Link] = "ES", [Link] = FALSE, neighbors = NULL,
main = "optimized portfolio plot", xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

plot(x, ..., rp = FALSE,
[Link] = "mean", [Link] = "ES", [Link] = FALSE,
[Link] = 0.8, [Link] = "darkgray", neighbors = NULL,
main = "[Link]", xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

plot(x, ..., [Link] = "mean",
[Link] = "ES", [Link] = FALSE, [Link] = 0.8,
[Link] = "darkgray", neighbors = NULL, main = "[Link]",
xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

plot(x, ..., rp = FALSE, [Link] = "ES",
[Link] = "mean", [Link] = FALSE, [Link] = "darkgray",
neighbors = NULL, main = "[Link]", xlim = NULL, ylim = NULL)

## S3 method for class '[Link]'

plot(x, ..., [Link] = "mean",
[Link] = "ES", [Link] = FALSE, neighbors = NULL, xlim = NULL,
86 [Link]

ylim = NULL, main = "optimized portfolio plot")

## S3 method for class '[Link]'

plot(x, ..., [Link] = "mean",
[Link] = "ES", [Link] = FALSE, neighbors = NULL, xlim = NULL,
ylim = NULL, main = "optimized portfolio plot")

Arguments

x set of portfolios created by [Link]

... any other passthru parameters
rp TRUE/FALSE to plot feasible portfolios generated by random_portfolios
[Link] string name of column to use for returns (vertical axis)
[Link] string name of column to use for risk (horizontal axis)
[Link] TRUE/FALSE to include risk-return scatter of assets
neighbors set of ’neighbor portfolios to overplot
main an overall title for the plot: see title
xlim set the limit on coordinates for the x-axis
ylim set the limit on coordinates for the y-axis
[Link] provides the color for drawing less-important chart elements, such as the box
lines, axis lines, etc.
[Link] the magnification to be used for axis annotation relative to the current setting of
cex.

Details

[Link] must be the name of a function used to compute the return metric on the random
portfolio weights [Link] must be the name of a function used to compute the risk metric on the
random portfolio weights
neighbors may be specified in three ways. The first is as a single number of neighbors. This will
extract the neighbors closest portfolios in terms of the out numerical statistic. The second method
consists of a numeric vector for neighbors. This will extract the neighbors with portfolio index
numbers that correspond to the vector contents. The third method for specifying neighbors is to
pass in a matrix. This matrix should look like the output of extractStats, and should contain
[Link],[Link], and weights columns all properly named.
The ROI and GenSA solvers do not store the portfolio weights like DEoptim or random portfolios,
random portfolios can be generated for the scatter plot with the rp argument.
[Link] 87

[Link] Portfolio Moments

Description
Set portfolio moments for use by lower level optimization functions using a basic Black Litterman
model.

Usage
[Link](R, portfolio, momentargs = NULL, P, Mu = NULL,
Sigma = NULL, ...)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type portfolio specifying the constraints and objectives for the
optimization, see [Link]
momentargs list containing arguments to be passed down to lower level functions, default
NULL
P a K x N pick matrix representing views
Mu vector of length N of the prior expected values. The sample mean is used if
Mu=NULL.
Sigma an N x N matrix of the prior covariance matrix. The sample covariance is used
if Sigma=NULL.
... any other passthru parameters

Note
If any of the objectives in the portfolio object have clean as an argument, the cleaned returns are
used to fit the model.

[Link]
Portfolio Moments

Description
Set portfolio moments for use by lower level optimization functions using a statistical factor model
based on the work of Kris Boudt.

Usage
[Link](R, portfolio, momentargs = NULL, k = 1, ...)
88 [Link]

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type portfolio specifying the constraints and objectives for the
optimization, see [Link]
momentargs list containing arguments to be passed down to lower level functions, default
NULL
k number of factors used for fitting statistical factor model
... any other passthru parameters

Note
If any of the objectives in the portfolio object have clean as an argument, the cleaned returns are
used to fit the model.

[Link] constructor for class portfolio

Description
The portfolio object is created with [Link]. The portfolio object is an S3 object of class
’portfolio’ used to hold the initial asset weights, constraints, objectives, and other information about
the portfolio. The only required argument to [Link] is assets.

Usage
[Link](assets = NULL, category_labels = NULL, weight_seq = NULL,
message = FALSE)

Arguments
assets number of assets, or optionally a named vector of assets specifying seed weights.
If seed weights are not specified, an equal weight portfolio will be assumed.
category_labels
character vector to categorize assets by sector, industry, geography, market-cap,
currency, etc. Default NULL
weight_seq seed sequence of weights, see generatesequence Default NULL
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.

Details
The portfolio object contains the following elements:
• assets named vector of the seed weights
• category_labels character vector to categorize the assets by sector, geography, etc.
• weight_seq sequence of weights used by random_portfolios. See generatesequence
portfolio_risk_objective 89

• constraints a list of constraints added to the portfolio object with [Link]

• objectives a list of objectives added to the portfolio object with [Link]
• call the call to [Link] with all of the specified arguments

Value
an object of class portfolio

Author(s)
Ross Bennett, Brian G. Peterson

See Also
[Link], [Link], [Link]

Examples
data(edhec)
pspec <- [Link](assets=colnames(edhec))
pspec <- [Link](assets=10, weight_seq=generatesequence())

portfolio_risk_objective
constructor for class portfolio_risk_objective

Description
if target is null, we’ll try to minimize the risk metric

Usage
portfolio_risk_objective(name, target = NULL, arguments = NULL,
multiplier = 1, enabled = TRUE, ...)

Arguments
name name of the objective, should correspond to a function, though we will try to
make allowances
target univariate target for the objective
arguments default arguments to be passed to an objective function when executed
multiplier multiplier to apply to the objective, usually 1 or -1
enabled TRUE/FALSE
... any other passthru parameters
90 position_limit_constraint

Value
object of class ’portfolio_risk_objective’

Author(s)
Brian G. Peterson

position_limit_constraint
constructor for position_limit_constraint

Description
This function is called by [Link] when type="position_limit" is specified, [Link]
Allows the user to specify the maximum number of positions (i.e. number of assets with non-zero
weights) as well as the maximum number of long and short positions.

Usage
position_limit_constraint(type = "position_limit", assets, max_pos = NULL,
max_pos_long = NULL, max_pos_short = NULL, enabled = TRUE,
message = FALSE, ...)

Arguments
type character type of the constraint
assets named vector of assets specifying initial weights
max_pos maximum number of assets with non-zero weights
max_pos_long maximum number of assets with long (i.e. buy) positions
max_pos_short maximum number of assets with short (i.e. sell) positions
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify position limit constraints

Value
an object of class ’position_limit_constraint’

Author(s)
Ross Bennett

See Also
[Link]
pos_limit_fail 91

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

pspec <- [Link](portfolio=pspec, type="position_limit", max_pos=3)

pspec <- [Link](portfolio=pspec, type="position_limit", max_pos_long=3, max_pos_short=1)

pos_limit_fail function to check for violation of position limits constraints

Description
This is used as a helper function for rp_transform to check for violation of position limit con-
straints. The position limit constraints checked are max_pos, max_pos_long, and max_pos_short.

Usage
pos_limit_fail(weights, max_pos, max_pos_long, max_pos_short)

Arguments
weights vector of weights to test
max_pos maximum number of assets with non-zero weights
max_pos_long maximum number of assets with long (i.e. buy) positions
max_pos_short maximum number of assets with short (i.e. sell) positions

Value
TRUE if any position_limit is violated. FALSE if all position limits are satisfied

[Link] print method for constraint objects

Description
print method for constraint objects

Usage
## S3 method for class 'constraint'
print(x, ...)
92 [Link]

Arguments

x object of class constraint

... any other passthru parameters

Author(s)

Ross Bennett

[Link]
Print an efficient frontier object

Description

Print method for efficient frontier objects. Display the call to create or extract the efficient frontier
object and the portfolio from which the efficient frontier was created or extracted.

Usage

## S3 method for class '[Link]'

print(x, ...)

Arguments

x objective of class [Link]

... any other passthru parameters

Author(s)

Ross Bennett

See Also

[Link]
[Link] 93

[Link]
Printing output of [Link]

Description
print method for [Link] objects

Usage
## S3 method for class '[Link]'
print(x, ..., digits = 4)

Arguments
x an object used to select a method
... any other passthru parameters
digits the number of significant digits to use when printing.

Author(s)
Ross Bennett

See Also
[Link]

[Link]
Printing output of [Link]

Description
print method for [Link] objects

Usage
## S3 method for class '[Link]'
print(x, ..., digits = 4)

## S3 method for class '[Link]'

print(x, ..., digits = 4)

## S3 method for class '[Link]'

print(x, ..., digits = 4)
94 [Link]

## S3 method for class '[Link]'

print(x, ..., digits = 4)

## S3 method for class '[Link]'

print(x, ..., digits = 4)

Arguments
x an object used to select a method
... any other passthru parameters
digits the number of significant digits to use when printing.

Author(s)
Ross Bennett

See Also
[Link]

[Link] Printing Portfolio Specification Objects

Description
Print method for objects of class portfolio created with [Link]

Usage
## S3 method for class 'portfolio'
print(x, ...)

Arguments
x an object of class portfolio
... any other passthru parameters

Author(s)
Ross Bennett

See Also
[Link]
[Link] 95

[Link]
Printing summary output of [Link]

Description
print method for objects of class [Link]

Usage
## S3 method for class '[Link]'
print(x, ...)

Arguments
x an object of class [Link].
... any other passthru parameters. Currently not used.

Author(s)
Ross Bennett

See Also
[Link]

[Link]
Printing summary output of [Link]

Description
print method for objects of class [Link]

Usage
## S3 method for class '[Link]'
print(x, ..., digits = 4)

Arguments
x an object of class [Link].
... any other passthru parameters
digits number of digits used for printing
96 quadratic_utility_objective

Author(s)

Ross Bennett

See Also

[Link]

quadratic_utility_objective
constructor for quadratic utility objective

Description

This function calls return_objective and portfolio_risk_objective to create a list of the

objectives to be added to the portfolio.

Usage

quadratic_utility_objective(risk_aversion = 1, target = NULL,

enabled = TRUE)

Arguments

risk_aversion risk_aversion (i.e. lambda) parameter to penalize variance

target target mean return value
enabled TRUE/FALSE, default enabled=TRUE

Value

a list of two elements

• return_objective
• portfolio_risk_objective

Author(s)

Ross Bennett
randomize_portfolio_v1 97

randomize_portfolio_v1
Random portfolio sample method

Description
This function generates random permutations of a portfolio seed meeting leverage and box con-
straints. The final step is to run fn_map on the random portfolio weights to transform the weights
so they satisfy other constraints such as group or position limit constraints. This is the ’sample’
method for random portfolios and is based on an idea by Pat Burns.

Usage
randomize_portfolio_v1(rpconstraints, max_permutations = 200, rounding = 3)

Arguments
rpconstraints an object of type "constraints" specifying the constraints for the optimization,
see constraint
max_permutations
integer: maximum number of iterations to try for a valid portfolio, default 200
rounding integer how many decimals should we round to

Value
named weights vector

Author(s)
Peter Carl, Brian G. Peterson, (based on an idea by Pat Burns)

randomize_portfolio_v2
version 2 generate random permutations of a portfolio seed meeting
your constraints on the weights of each asset

Description
version 2 generate random permutations of a portfolio seed meeting your constraints on the weights
of each asset

Usage
randomize_portfolio_v2(portfolio, max_permutations = 200)
98 random_portfolios_v1

Arguments
portfolio an object of type "portfolio" specifying the constraints for the optimization, see
[Link]
max_permutations
integer: maximum number of iterations to try for a valid portfolio, default 200

Value
named weighting vector

Author(s)
Peter Carl, Brian G. Peterson, (based on an idea by Pat Burns)

random_portfolios_v1 generate an arbitary number of constrained random portfolios

Description
repeatedly calls randomize_portfolio to generate an arbitrary number of constrained random
portfolios.

Usage
random_portfolios_v1(rpconstraints, permutations = 100, ...)

Arguments
rpconstraints an object of type "constraints" specifying the constraints for the optimization,
see constraint
permutations integer: number of unique constrained random portfolios to generate
... any other passthru parameters

Value
matrix of random portfolio weights

Author(s)
Peter Carl, Brian G. Peterson, (based on an idea by Pat Burns)

See Also
constraint, objective, randomize_portfolio
random_portfolios_v2 99

Examples
rpconstraint<-constraint(assets=10, min_mult=-Inf, max_mult=Inf, min_sum=.99,
max_sum=1.01, min=.01, max=.4, weight_seq=generatesequence())
rp<- random_portfolios_v1(rpconstraints=rpconstraint,permutations=1000)
head(rp)

random_portfolios_v2 version 2 generate an arbitary number of constrained random portfo-

lios

Description
Generate random portfolios using the ’sample’, ’simplex’, or ’grid’ method. See details.

Usage
random_portfolios_v2(portfolio, permutations = 100, rp_method = "sample",
eliminate = TRUE, ...)

Arguments
portfolio an object of class ’portfolio’ specifying the constraints for the optimization, see
[Link]
permutations integer: number of unique constrained random portfolios to generate
... any other passthru parameters
rp_method method to generate random portfolios. Currently "sample", "simplex", or "grid".
See Details.
eliminate TRUE/FALSE, eliminate portfolios that do not satisfy constraints

Details
Random portfolios can be generate using one of three methods.

• sample: The ’sample’ method to generate random portfolios is based on an idea pioneerd by
Pat Burns. This is the most flexible method, but also the slowest, and can generate portfolios
to satisfy leverage, box, group, position limit, and leverage exposure constraints.
• simplex: The ’simplex’ method to generate random portfolios is based on a paper by W. T.
Shaw. The simplex method is useful to generate random portfolios with the full investment
constraint, where the sum of the weights is equal to 1, and min box constraints. Values for
min_sum and max_sum of the leverage constraint will be ignored, the sum of weights will
equal 1. All other constraints such as group and position limit constraints will be handled
by elimination. If the constraints are very restrictive, this may result in very few feasible
portfolios remaining.
100 random_walk_portfolios

• grid: The ’grid’ method to generate random portfolios is based on the gridSearch function
in package ’NMOF’. The grid search method only satisfies the min and max box constraints.
The min_sum and max_sum leverage constraints will likely be violated and the weights in the
random portfolios should be normalized. Normalization may cause the box constraints to be
violated and will be penalized in constrained_objective.

The constraint types checked are leverage, box, group, position limit, and leverage exposure. Any
portfolio that does not satisfy all these constraints will be eliminated. This function is particularly
sensitive to min_sum and max_sum leverage constraints. For the sample method, there should be
some "wiggle room" between min_sum and max_sum in order to generate a sufficient number of
feasible portfolios. For example, min_sum=0.99 and max_sum=1.01 is recommended instead of
min_sum=1 and max_sum=1. If min_sum=1 and max_sum=1, the number of feasible portfolios may
be 1/3 or less depending on the other constraints.

Value
matrix of random portfolio weights

Author(s)
Peter Carl, Brian G. Peterson, Ross Bennett

See Also
[Link], objective, rp_sample, rp_simplex, rp_grid

random_walk_portfolios
deprecated random portfolios wrapper until we write a random trades
function

Description
deprecated random portfolios wrapper until we write a random trades function

Usage
random_walk_portfolios(...)

Arguments
... any other passthru parameters

Author(s)
bpeterson
[Link] 101

[Link] Regime Portfolios

Description
Construct a [Link] object that contains a time series of regimes and portfolios corre-
sponding to the regimes.

Usage
[Link](regime, portfolios)

Arguments
regime xts or zoo object specifying the regime
portfolios list of portfolios created by [Link] with corresponding regimes

Details
Create a [Link] object to support regime switching optimization. This object is then
passed in as the portfolio argument in [Link]. The regime is detected and the
corresponding portfolio is selected. For example, if the current regime is 1, then portfolio 1 will be
selected and used in the optimization.

Value
a [Link] object with the following elements
• regime: An xts object of the regime
• portfolio: List of portfolios corresponding to the regime

Author(s)
Ross Bennett

return_constraint constructor for return_constraint

Description
The return constraint specifes a target mean return value. This function is called by [Link]
when type="return" is specified, [Link]

Usage
return_constraint(type = "return", return_target, enabled = TRUE,
message = FALSE, ...)
102 return_objective

Arguments

type character type of the constraint

return_target return target value
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters

Value

an object of class ’return_constraint’

Author(s)

Ross Bennett

See Also

[Link]

Examples

data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

pspec <- [Link](portfolio=pspec, type="return", return_target=mean(colMeans(ret)))

return_objective constructor for class return_objective

Description

if target is null, we’ll try to maximize the return metric

Usage

return_objective(name, target = NULL, arguments = NULL, multiplier = -1,

enabled = TRUE, ...)
risk_budget_objective 103

Arguments
name name of the objective, should correspond to a function, though we will try to
make allowances
target univariate target for the objective
arguments default arguments to be passed to an objective function when executed
multiplier multiplier to apply to the objective, usually 1 or -1
enabled TRUE/FALSE
... any other passthru parameters

Details
if target is set, we’ll try to meet or exceed the metric, penalizing a shortfall

Value
object of class ’return_objective’

Author(s)
Brian G. Peterson

risk_budget_objective constructor for class risk_budget_objective

Description
constructor for class risk_budget_objective

Usage
risk_budget_objective(assets, name, target = NULL, arguments = NULL,
multiplier = 1, enabled = TRUE, ..., min_prisk, max_prisk,
min_concentration = FALSE, min_difference = FALSE)

Arguments
assets vector of assets to use, should come from constraints object
name name of the objective, should correspond to a function, though we will try to
make allowances
target univariate target for the objective
arguments default arguments to be passed to an objective function when executed
multiplier multiplier to apply to the objective, usually 1 or -1
enabled TRUE/FALSE
... any other passthru parameters
104 rp_grid

min_prisk minimum percentage contribution to risk

max_prisk maximum percentage contribution to risk
min_concentration
TRUE/FALSE whether to minimize concentration, default FALSE, always TRUE
if min_prisk and max_prisk are NULL
min_difference TRUE/FALSE whether to minimize difference between concentration, default
FALSE

Value
object of class ’risk_budget_objective’

Author(s)
Brian G. Peterson

rp_grid Generate random portfolios based on grid search method

Description
This function generates random portfolios based on the gridSearch function from the ’NMOF’
package.

Usage
rp_grid(portfolio, permutations = 2000, normalize = TRUE)

Arguments
portfolio an object of class ’portfolio’ specifying the constraints for the optimization, see
[Link]
permutations integer: number of unique constrained random portfolios to generate
normalize TRUE/FALSE to normalize the weghts to satisfy min_sum or max_sum

Details
The number of levels is calculated based on permutations and number of assets. The number of
levels must be an integer and may not result in the exact number of permutations. We round up to
the nearest integer for the levels so the number of portfolios generated will be greater than or equal
to permutations.
The grid search method only satisfies the min and max box constraints. The min_sum and max_sum
leverage constraints will likely be violated and the weights in the random portfolios should be
normalized. Normalization may cause the box constraints to be violated and will be penalized in
constrained_objective.
rp_sample 105

Value
matrix of random portfolio weights

rp_sample Generate random portfolios using the sample method

Description
This function generates random portfolios based on an idea by Pat Burns.

Usage
rp_sample(portfolio, permutations, max_permutations = 200)

Arguments
portfolio an object of type "portfolio" specifying the constraints for the optimization, see
[Link]
permutations integer: number of unique constrained random portfolios to generate
max_permutations
integer: maximum number of iterations to try for a valid portfolio, default 200

Details
The ’sample’ method to generate random portfolios is based on an idea pioneerd by Pat Burns. This
is the most flexible method, but also the slowest, and can generate portfolios to satisfy leverage,
box, group, and position limit constraints.

Value
a matrix of random portfolio weights

rp_simplex Generate random portfolios using the simplex method

Description
This function generates random portfolios based on the method outlined in the Shaw paper. Need
to add reference.

Usage
rp_simplex(portfolio, permutations, fev = 0:5)
106 rp_transform

Arguments
portfolio an object of class ’portfolio’ specifying the constraints for the optimization, see
[Link]
permutations integer: number of unique constrained random portfolios to generate
fev scalar or vector for FEV biasing

Details
The simplex method is useful to generate random portfolios with the full investment constraint
where the sum of the weights is equal to 1 and min box constraints with no upper bound on max
constraints. Values for min_sum and max_sum will be ignored, the sum of weights will equal 1.
All other constraints such as group and position limit constraints will be handled by elimination. If
the constraints are very restrictive, this may result in very few feasible portfolios remaining.
The random portfolios are created by first generating a set of uniform random numbers.

U ∼ [0, 1]

The portfolio weights are then transformed to satisfy the min of the box constraints.
N
X log(Uiq
wi = mini + (1 − minj ) PN q
j=1 k=1 log(Uk

fev controls the Face-Edge-Vertex (FEV) biasing where

q = 2f ev

As q approaches infinity, the set of weights will be concentrated in a single asset. To sample the inte-
rior and exterior, fev can be passed in as a vector. The number of portfolios, permutations, and the
length of fev affect how the random portfolios are generated. For example, if permutations=10000
and fev=0:4, 2000 portfolios will be generated for each value of fev.

Value
a matrix of random portfolio weights

rp_transform Transform a weights vector to satisfy constraints

Description
This function uses a block of code from randomize_portfolio to transform the weight vector
if either the weight_sum (leverage) constraints, box constraints, group constraints, position_limit
constraints, or leverage exposure constraints are violated. The logic from randomize_portfolio
is heavily utilized here with extensions to handle more complex constraints. The resulting weights
vector might be quite different from the original weights vector.
scatterFUN 107

Usage
rp_transform(w, min_sum, max_sum, min_box, max_box, groups = NULL,
cLO = NULL, cUP = NULL, max_pos = NULL, group_pos = NULL,
max_pos_long = NULL, max_pos_short = NULL, leverage = NULL,
weight_seq = NULL, max_permutations = 200)

Arguments
w weights vector to be transformed
min_sum minimum sum of all asset weights, default 0.99
max_sum maximum sum of all asset weights, default 1.01
min_box numeric or named vector specifying minimum weight box constraints
max_box numeric or named vector specifying maximum weight box constraints
groups vector specifying the groups of the assets
cLO numeric or vector specifying minimum weight group constraints
cUP numeric or vector specifying minimum weight group constraints
max_pos maximum assets with non-zero weights
group_pos vector specifying maximum number assets with non-zero weights per group
max_pos_long maximum number of assets with long (i.e. buy) positions
max_pos_short maximum number of assets with short (i.e. sell) positions
leverage maximum leverage exposure where leverage is defined as sum(abs(weights))
max_permutations
integer: maximum number of iterations to try for a valid portfolio, default 200
weight_seq vector of seed sequence of weights

Value
named weighting vector

Author(s)
Peter Carl, Brian G. Peterson, Ross Bennett (based on an idea by Pat Burns)

scatterFUN Apply a risk or return function to asset returns

Description
This function is used to calculate risk or return metrics given a matrix of asset returns and will be
used for a risk-reward scatter plot of the assets
108 [Link].moments_v1

Usage

scatterFUN(R, FUN, arguments = NULL)

Arguments

R xts object of asset returns

FUN name of function
arguments named list of arguments to FUN

Author(s)

Ross Bennett

[Link].moments_v1
set portfolio moments for use by lower level optimization functions

Description

set portfolio moments for use by lower level optimization functions

Usage

[Link].moments_v1(R, constraints, momentargs = NULL, ...)

Arguments

R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
constraints an object of type "constraints" specifying the constraints for the optimization,
see constraint
momentargs list containing arguments to be passed down to lower level functions, default
NULL
... any other passthru parameters
[Link].moments_v2 109

[Link].moments_v2
Portfolio Moments

Description
Set portfolio moments for use by lower level optimization functions. Currently three methods for
setting the moments are available

Usage
[Link].moments_v2(R, portfolio, momentargs = NULL,
method = c("sample", "boudt", "black_litterman", "meucci"), ...)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
portfolio an object of type "portfolio" specifying the constraints and objectives for the
optimization, see [Link]
momentargs list containing arguments to be passed down to lower level functions, default
NULL
method the method used to estimate portfolio moments. Valid choices include "sample",
"boudt", and "black_litterman".
... any other passthru parameters

Details
• sample: sample estimates are used for the moments
• boudt: estimate the second, third, and fourth moments using a statistical factor model based
on the work of Kris Boudt. See [Link]
• black_litterman: estimate the first and second moments using the Black Litterman Formula.
See [Link].

[Link]
Statistical Factor Model

Description
Fit a statistical factor model using Principal Component Analysis (PCA)

Usage
[Link](R, k = 1, ...)
110 [Link]

Arguments
R xts of asset returns
k number of factors to use
... additional arguments passed to prcomp

Details
The statistical factor model is fitted using prcomp. The factor loadings, factor realizations, and
residuals are computed and returned given the number of factors used for the model.

Value
#’

• factor_loadings N x k matrix of factor loadings (i.e. betas)

• factor_realizations m x k matrix of factor realizations
• residuals m x N matrix of model residuals representing idiosyncratic risk factors

Where N is the number of assets, k is the number of factors, and m is the number of observations.

[Link]
Summarize an efficient frontier object

Description
Summary method for efficient frontier objects. Display the call to create or extract the efficient
frontier object as well as the weights and risk and return metrics along the efficient frontier.

Usage
## S3 method for class '[Link]'
summary(object, ..., digits = 3)

Arguments
object object of class [Link]
... passthrough parameters
digits number of digits to round to

Author(s)
Ross Bennett
[Link] 111

[Link]
Summarizing output of [Link]

Description
summary method for class [Link]

Usage
## S3 method for class '[Link]'
summary(object, ...)

Arguments
object an object of class [Link].
... any other passthru parameters. Currently not used.

Author(s)
Ross Bennett

See Also
[Link]

[Link]
summary method for [Link]

Description
summary method for [Link]

Usage
## S3 method for class '[Link]'
summary(object, ...)

Arguments
object object of type [Link]
... any other passthru parameters
112 trailingFUN

[Link] Summarize Portfolio Specification Objects

Description
summary method for class portfolio created with [Link]

Usage
## S3 method for class 'portfolio'
summary(object, ...)

Arguments
object an object of class portfolio
... any other passthru parameters

Author(s)
Ross Bennett

See Also
[Link]

trailingFUN apply a function over a configurable trailing period

Description
this function is primarily designed for use with portfolio functions passing ’x’ or ’R’ and weights,
but may be usable for other things as well, see Example for a vector example.

Usage
trailingFUN(R, weights, n = 0, FUN, FUNargs = NULL, ...)

Arguments
R an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns
weights a vector of weights to test
... any other passthru parameters
n numeric number of trailing periods
FUN string describing the function to be called
FUNargs list describing any additional arguments
transaction_cost_constraint 113

Details
called with e.g.
trailingFUN(seq(1:100), weights=NULL, n=12, FUN=’mean’,FUNargs=list())

transaction_cost_constraint
constructor for transaction_cost_constraint

Description
The transaction cost constraint specifies a proportional cost value. This function is called by
[Link] when type="transaction_cost" is specified, see [Link].

Usage
transaction_cost_constraint(type = "transaction_cost", assets, ptc,
enabled = TRUE, message = FALSE, ...)

Arguments
type character type of the constraint
assets number of assets, or optionally a named vector of assets specifying initial weights
ptc proportional transaction cost value
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify box and/or group constraints

Details
Note that with the ROI solvers, proportional transaction cost constraint is currently only supported
for the global minimum variance and quadratic utility problems with ROI quadprog plugin.

Value
an object of class ’transaction_cost_constraint’

Author(s)
Ross Bennett

See Also
[Link]
114 turnover_constraint

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

pspec <- [Link](portfolio=pspec, type="transaction_cost", ptc=0.01)

turnover Calculates turnover given two vectors of weights. This is used as an

objective function and is called when the user adds an objective of type
turnover with [Link]

Description
Calculates turnover given two vectors of weights. This is used as an objective function and is called
when the user adds an objective of type turnover with [Link]

Usage
turnover(weights, [Link] = NULL)

Arguments
weights vector of weights from optimization
[Link] vector of initial weights used to calculate turnover from

Author(s)
Ross Bennett

turnover_constraint constructor for turnover_constraint

Description
The turnover constraint specifies a target turnover value. This function is called by [Link]
when type="turnover" is specified, see [Link]. Turnover is calculated from a set of initial
weights. Turnover is computed as sum(abs(initial_weights - weights)) / N where N is the
number of assets.

Usage
turnover_constraint(type = "turnover", turnover_target, enabled = TRUE,
message = FALSE, ...)
turnover_objective 115

Arguments
type character type of the constraint
turnover_target
target turnover value
enabled TRUE/FALSE
message TRUE/FALSE. The default is message=FALSE. Display messages if TRUE.
... any other passthru parameters to specify box and/or group constraints

Details
Note that with the ROI solvers, turnover constraint is currently only supported for the global mini-
mum variance and quadratic utility problems with ROI quadprog plugin.

Value
an object of class ’turnover_constraint’

Author(s)
Ross Bennett

See Also
[Link]

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

pspec <- [Link](portfolio=pspec, type="turnover", turnover_target=0.6)

turnover_objective constructor for class turnover_objective

Description
if target is null, we’ll try to minimize the turnover metric

Usage
turnover_objective(name, target = NULL, arguments = NULL, multiplier = 1,
enabled = TRUE, ...)
116 [Link]

Arguments
name name of the objective, should correspond to a function, though we will try to
make allowances
target univariate target for the objective
arguments default arguments to be passed to an objective function when executed
multiplier multiplier to apply to the objective, usually 1 or -1
enabled TRUE/FALSE
... any other passthru parameters

Details
if target is set, we’ll try to meet the metric

Value
an objective of class ’turnover_objective’

Author(s)
Ross Bennett

[Link] function for updating constrints, not well tested, may be broken

Description
can we use the generic [Link] function?

Usage
## S3 method for class 'constraint'
update(object, ...)

Arguments
object object of type constraint to update
... any other passthru parameters, used to call constraint

Author(s)
bpeterson
update_constraint_v1tov2 117

update_constraint_v1tov2
Helper function to update v1_constraint objects to v2 specification in
the portfolio object

Description
The function takes the constraints and objectives specified in the v1_constraint object and up-
dates the portfolio object with those constraints and objectives. This function is used inside op-
[Link] to maintain backwards compatibility if the user passes in a v1_constraint object for
the constraint arg in [Link].

Usage
update_constraint_v1tov2(portfolio, v1_constraint)

Arguments
portfolio portfolio object passed into [Link]
v1_constraint object of type v1_constraint passed into [Link]

Value
portfolio object containing constraints and objectives from v1_constraint

Author(s)
Ross Bennett

See Also
[Link], [Link]

[Link] Calculate portfolio variance

Description
This function is used to calculate the portfolio variance via a call to constrained_objective when var
is an object for mean variance or quadratic utility optimization.

Usage
[Link](R, weights)
118 weight_concentration_objective

Arguments
R xts object of asset returns
weights vector of asset weights

Value
numeric value of the portfolio variance

Author(s)
Ross Bennett

weight_concentration_objective
Constructor for weight concentration objective

Description
This function penalizes weight concentration using the Herfindahl-Hirschman Index as a measure
of concentration.

Usage
weight_concentration_objective(name, conc_aversion, conc_groups = NULL,
arguments = NULL, enabled = TRUE, ...)

Arguments
name name of concentration measure, currently only "HHI" is supported.
conc_aversion concentration aversion value(s)
conc_groups list of vectors specifying the groups of the assets. Similar to groups in group_constraint
arguments default arguments to be passed to an objective function when executed
enabled TRUE/FALSE
... any other passthru parameters

Details
The conc_aversion argument can be a scalar or vector of concentration aversion values. If conc_aversion
is a scalar and conc_groups is NULL, then the concentration aversion value will be applied to the
overall weights.
If conc_groups is specified as an argument, then the concentration aversion value(s) will be applied
to each group.

Value
an object of class ’weight_concentration_objective’
weight_sum_constraint 119

Author(s)
Ross Bennett

weight_sum_constraint constructor for weight_sum_constraint

Description
The constraint specifies the upper and lower bound on the sum of the weights. This function is
called by [Link] when "weight_sum", "leverage", "full_investment", "dollar_neutral", or
"active" is specified as the type. see [Link]

Usage
weight_sum_constraint(type = "weight_sum", min_sum = 0.99, max_sum = 1.01,
enabled = TRUE, ...)

Arguments
type character type of the constraint
min_sum minimum sum of all asset weights, default 0.99
max_sum maximum sum of all asset weights, default 1.01
enabled TRUE/FALSE
... any other passthru parameters to specify weight_sum constraints

Details
Special cases for the weight_sum constraint are "full_investment" and "dollar_nuetral" or "active"
If type="full_investment", min_sum=1 and max_sum=1
If type="dollar_neutral" or type="active", min_sum=0, and max_sum=0

Value
an object of class ’weight_sum_constraint’

Author(s)
Ross Bennett

See Also
[Link]
120 weight_sum_constraint

Examples
data(edhec)
ret <- edhec[, 1:4]

pspec <- [Link](assets=colnames(ret))

# min_sum and max_sum can be specified with type="weight_sum" or type="leverage"

pspec <- [Link](pspec, type="weight_sum", min_sum=1, max_sum=1)

# Specify type="full_investment" to set min_sum=1 and max_sum=1

pspec <- [Link](pspec, type="full_investment")

# Specify type="dollar_neutral" or type="active" to set min_sum=0 and max_sum=0

pspec <- [Link](pspec, type="dollar_neutral")
pspec <- [Link](pspec, type="active")
Index

∗Topic datasets constrained_objective_v1

indexes, 66 (constrained_objective), 40
constrained_objective_v2
[Link], 10 (constrained_objective), 40
[Link], 6, 11, 20, 42, 43, 47, 48, 57, constraint, 14, 41, 41, 60, 81, 97, 98, 108,
58, 64, 71, 89, 90, 101, 102, 116
113–115, 117, 119 constraint_ROI, 42
[Link], 6, 13, 77, 78, 80, 89, 114 constraint_v2, 43
add.objective_v1 ([Link]), 13 coskewnessMF, 43
add.objective_v2 ([Link]), 13 coskewnessSF, 44
[Link], 15 covarianceMF, 44
applyFUN, 16 covarianceSF, 45
[Link], 8, 29, 46, 92
barplotGroupWeights, 17
[Link], 18, 109 [Link], 41
diversification, 47
BlackLittermanFormula, 18, 19
diversification_constraint, 11, 12, 47
box_constraint, 11, 12, 20
endpoints, 16, 83
[Link], 21 EntropyProg, 48
center, 21 [Link], 50
[Link], 10, 22 ES, 8
[Link], 10, 23 etl_milp_opt, 51
[Link], 10, 23 etl_opt, 51
[Link], 10, 24 extractCokurtosis, 52
[Link], 25 extractCoskewness, 53
[Link], 8, 26 extractCovariance, 53
[Link], 8, 27 extractEfficientFrontier, 54
[Link], 29 extractGroups, 55
[Link], 30 extractObjectiveMeasures, 55
[Link], 8, 31 extractStats, 32, 34, 56, 86
[Link], 7, 8, 33 extractWeights, 57
[Link], 31, 32, 35, 36
[Link], 7, 8, 35 factor_exposure_constraint, 11, 12, 57
check_constraints, 37 fn_map, 59, 97
cokurtosisMF, 37
cokurtosisSF, 38 generatesequence, 42, 60, 88
[Link], 8, 39 get_constraints, 60
[Link], 29, 39 gmv_opt, 61
constrained_objective, 40, 50, 68 gmv_opt_leverage, 62

121
122 INDEX

gmv_opt_ptc, 62 [Link], 87
gmv_opt_toc, 63 [Link], 87
group_constraint, 11, 12, 64, 118 [Link], 6, 11–14, 16, 29, 39, 46, 47,
group_fail, 65 61, 73, 78, 82, 84, 87, 88, 88, 94,
98–100, 104–106, 109, 112, 117
HHI, 66 portfolio_risk_objective, 89, 96
PortfolioAnalytics
indexes, 66 (PortfolioAnalytics-package), 4
insert_constraints, 67 PortfolioAnalytics-package, 4
insert_objectives, 67 pos_limit_fail, 91
[Link], 68 position_limit_constraint, 11, 12, 90
[Link], 69 [Link], 91
[Link], 69 [Link], 92
[Link], 70 [Link]
([Link]),
leverage_exposure_constraint, 11, 12, 70
93
maxret_milp_opt, 71 [Link]
maxret_opt, 72 ([Link]),
[Link], 46, 47, 72 93
[Link], 46, 47, 73 [Link]
[Link], 74, 75 ([Link]),
[Link], 74 93
minmax_objective, 75 [Link]
[Link], 16, 76 ([Link]),
93
[Link], 77 [Link],
93
objective, 14, 41, 60, 77, 98, 100 [Link], 93
[Link], 7, 8, 16, 25, 27, 28, 31, [Link], 94
32, 34–36, 39, 41, 46, 47, 54, 56, 57, [Link], 95
73, 78, 83, 84, 86, 89, 94, 111 [Link],
[Link], 82 95
[Link], 7, 8, 16,
31, 32, 35, 36, 57, 83, 93 quadratic_utility_objective, 96
[Link].rebalancing_v1
([Link]), random_portfolios, 86, 88
83 random_portfolios
optimize.portfolio_v1 (random_portfolios_v2), 99
([Link]), 78 random_portfolios_v1, 98
optimize.portfolio_v2 random_portfolios_v2, 99
([Link]), 78 random_walk_portfolios, 100
randomize_portfolio, 98, 106
plot, 17, 25–32, 34 randomize_portfolio
[Link] (randomize_portfolio_v2), 97
([Link]), randomize_portfolio_v1, 97
85 randomize_portfolio_v2, 97
[Link], 85 [Link], 101
portfolio, 13, 40 return_constraint, 11, 12, 101
portfolio ([Link]), 88 return_objective, 96, 102
INDEX 123

risk_budget_objective, 103
rp_grid, 100, 104
rp_sample, 100, 105
rp_simplex, 100, 105
rp_transform, 65, 91, 106

scatterFUN, 107
[Link]
([Link].moments_v2), 109
[Link].moments_v1, 108
[Link].moments_v2, 79, 82, 109
[Link], 52–54, 109,
109
StdDev, 8
[Link], 110
[Link], 95, 111
[Link],
96, 111
[Link], 112

title, 17, 30, 36, 86

trailingFUN, 112
transaction_cost_constraint, 113
turnover, 114
turnover_constraint, 11, 12, 114
turnover_objective, 115

[Link], 116
update_constraint_v1tov2, 117

VaR, 8
[Link], 117

weight_concentration_objective, 118
weight_sum_constraint, 11, 12, 119

xts, 8