Fall 2020-21 - MAFS5310 - Portfolio Optimization with R (MSc in Financial Mathematics - MAFM)

Sep 1, 2020

The Hong Kong University of Science and Technology (HKUST), Fall 2020-21
Prof. Daniel P. Palomar

Description

Modern portfolio theory started with Harry Markowitz’s 1952 seminal paper “Portfolio Selection,” for which he would later receive the Nobel prize in 1990. He put forth the idea that risk-adverse investors should optimize their portfolio based on a combination of two objectives: expected return and risk. Until today, that idea has remained central in portfolio optimization. However, the vanilla Markowitz portfolio formulation does not seem to behave as expected in practice and most practitioners tend to avoid it.

During the past half century, researchers and practitioners have reconsidered the Markowitz portfolio formulation and have proposed countless of improvements and variations, namely, robust optimization methods, alternative measures of risk (e.g., CVaR or ES), regularization via sparsity, improved estimators of the covariance matrix via random matrix theory, robust estimators for heavy tails, factor models, mean models, volatility clustering models, risk-parity formulations, etc.

This course will explore the Markowitz portfolio optimization in its many variations and extensions, with special emphasis on R programming. Each week will be devoted to a specific topic, during which the theory will be first presented, followed by an exposition of a practical implementation based on R programming.

Textbooks

Yiyong Feng and Daniel P. Palomar, A Signal Processing Perspective on Financial Engineering, Foundations and Trends® in Signal Processing, Now Publishers, 2016. [pdf]
S. Boyd and L. Vandenberghe, Convex Optimization, Cambridge University Press, 2004.
G. Cornuejols and R. Tutuncu, Optimization Methods in Finance. Cambridge Univ. Press, 2007.
F. J. Fabozzi, P. N. Kolm, D. A. Pachamanova, and S. M. Focardi, Robust Portfolio Optimization and Management. Wiley, 2007.

Lectures

Course syllabus.

Week 1 (8-Sep-2020):
Theory: Introduction to convex optimization
Practice: R for finance primer
Week 2 (15-Sep-2020):
  Theory: Convex optimization problems
  Practice: Solvers in R
Week 3 (22-Sep-2020):
Slides: portfolio optimization
Portfolio game Round 1: portfolio game with backtest based on the R package portfolioBacktest
Week 4 (29-Sep-2020):
Backtesting: slides
Data cleaning: slides
Portfolio game - Round 2
Week 5 (6-Oct-2020):
  Theory: Prior information: Shrinkage and Black-Litterman
  Practice: Prior information: Shrinkage and Black-Litterman with R
  Additional material on factor models: slides, R session.
  Portfolio game - Round 3
Typhoon week (13-Oct-2020):
  Portfolio game - Round 4
Week 6 (20-Oct-2020):
  Theory: Regularized robust estimators under heavy tails and outliers
  Practice: Heavy-tailed estimators with R
Software: R package fitHeavyTail
  Portfolio game - Round 5
Week 7 (27-Oct-2020):
Slides: Robust portfolio optimization
  Portfolio game - Round 6
Week 8 (3-Nov-2020):
Slides: Portfolio design with alternative risk measures
  Portfolio game - Round 7
Week 9 (10-Nov-2020):
Slides: Risk parity portfolio
Software: R package riskParityPortfolio
  Portfolio game - Round 8
Week 10 (17-Nov-2020):
Slides: Index tracking
Software: R package sparseIndexTracking
Week 11 (24-Nov-2020):
  Theory: Time series modeling of financial data
  Practice: Time series modeling of financial data with R
Week 12 (1-Dec-2020):
  Theory: Pairs trading
  Practice: Pairs trading with R
    Presentations of final projects by students