Almost Exact Risk Budgeting with Return Forecasts for Portfolio Allocation
Computational Engineering, Finance, and Science
2022-10-04 v1
Abstract
In this paper, we revisit the portfolio allocation problem with designated risk-budget [Qian, 2005]. We generalize the problem of arbitrary risk budgets with unequal correlations to one that includes return forecasts and transaction costs while keeping the no-shorting (long-only positions) constraint. We offer a convex second order cone formulation that scales well with the number of assets and explore solutions to the problem in different settings. In particular, the problem is solved on a few practical cases - on equity and bond asset allocation problems as well as formulating index constituents for the NASDAQ100 index, illustrating the benefits of this approach.
Cite
@article{arxiv.2210.00969,
title = {Almost Exact Risk Budgeting with Return Forecasts for Portfolio Allocation},
author = {Avinash Bhardwaj and Manjesh K Hanawal and Purushottam Parthasarathy},
journal= {arXiv preprint arXiv:2210.00969},
year = {2022}
}