Optimization

(Project !)
2 due
Sunday
 AssessPortfolio -
list of stocks
(the old project t)
" " # 1 unknown
symbols & number
/ -
list of allocations
( list sums to 1)
→

inks J start date , end date

↳
-

- cash to invest

start date allocations

Invest all cash as
per
.

on

No further trades
Calculate portfolio value each
day
especially
.

end date Return portfolio statistics ,

through Ratio
.

Sharpe .

and method)
( see end of lecture notes 4 for #
pseudocode .

calculation these dates, stocks,

That's a useful one-way
:
given
cash and allocations ,
what is the performance?
But what about the other direction?
← given → find
Dates ,
cash , stocks → best alloaations
7 → 100% in best stock
cumul return

W!fKgft%M?min
Max . .

?→ don't invest?
risk or volatility
2 best risk adjusted
Sharpe Ratio
-

→
Max .
return!

This is a
good job it searches parameter
for an optimizer :

find parameters
to
space trying or maximize some
function
that minimize
Actually just minimizing
,
is
enough !
find the vector X that minimizes
So some IX) y .

y
-

,
given
-

X This is all an optimizer does

What does an
optimizer
do
internally ? Local search
- -

works great on convex functions .

A-ssumescalarx.yforsimplicity.PK
any two values compute f④=y x ,
,

between CX g.) and CK yd

draw a line . , , .

? Examples
Is
-
entire line ab_wefCxS=y it
parabola?yes
If yes everywhere I cubic? no
x
the slope
-

? no
o

¥y
-

optimizer is multiple
If convex ,
to return minima ? no KW
guaranteedcorrect answer
a
"
"

unique is not atone

Cie one )
true minimum en f Cx)=y
epsilon E f
.

within some selected =y

 neural network is X
Bythe way ,
a ,

¥
just a function ! Xz
'

sin: in:#em:c:#urate .
predictions optimizer
,
so the

should minimize the difference fly)=Y

between predictions
and
reality !
So the optimization function should use
ypredicted & Tactual

.is#n:e7Irzed.Ii. Y. YtIa=oYb.tfi Iediotias

difference would betsad
a
→
The plain

er's:* differences
errors cancel
out weird
opposing
-

)
all errors proportional
1) sum of abs (errors ←

might
:
use
So we
2) sum of squared errors
worse errors
←

count more
3) root mean squared error (disproportionately)
Now project 2 is
easy
to explain .

I write
.
a
Python function : Halloa) SharpeRatio →

to find a Hoos that maximize SR

2 . use
optimizer .

the function from I

#
by repeatedly calling .

Just don't forget

:

allocate
can 't less than 08 or more
a) you
than 1008 to a stock
b) total allocations should be 100%
your( want to invest all your cash)
 optimize minimize C) ← our optimizer
Scipy .
.

real defined function

" "

functionto minimize a lambda or a

f.
,

(local search needs

¥ an initial parameter
•
setting always
state) current we ask you to use YN
[
" -

an a
TD numpy array length number of stocks
. -

→ er
-

a ,

* it •
an optimization method
-
we use SLSQP
row )
(sequential least squares
most scipy
is bounds & constraints and
why? we need ,
both of those
↳ methods dont
optimization support .

Rightpimizermightrenrnbestaocat.ms
of 0.730.2 that's 1508 of
: 0.6 ,
- our cash .

So we need a constraint : sum Callas) -

- 1.0

Then our optimizer might return : 0.9 , 0.3 , -0.2

weird ( we haven't
Google
'' "
-
invest -20% in is

talked about shorting stocks yet

so each allocation needs bounds [o B ,

 How can we
specify those to
scipy?

bounds : a sequence leg . list or

tuple)
of 2 tuples (pairs one per
unbounded)
- ,
"

in order ( None for

"

parameter ,
.

e.s
(( Max,) (Mine
)
Max,)
'

Ma mins ,
bounds = min ,
, ,
,

of diets (one diet per

)
constraint
a list
constraints :

in dict? fun , type

' '
' '

minimum keys required

defined function the constraint
(
'
fun
'
lambda
= or Python
'
' ' '
i
'
eg or neg
type
' =

t t
fun = o fun Z 0
If need e or constants
These two options you
the
only zero , adapt fan to work!
'
are .

besides
 example constraint? X
,
the E I
←
mydescionresdtra.it
(X ,tXz) Z I ←
mathematically
-

equivalent
-

ntsisffemone
use
→ -
( x tutti
,
20
"

I can
'
ineg
'
and fun =
Cx,txz)t1
type
-

so I set
-_

pou¥q¥¥ X, Xz lxfxd-CX.tw
It
?
If V
?

+ I
Zo ?

µ
,gversiM2-1iV-#
constraint X SAME z 2 4 - 4 X -3 X
fail ✓ V
* or l ✓

paradigm
O -
I I z
-

pass .

o V V V
o o o ,