Portfolio optimization with discrete simulated annealing

• URL: http://arxiv.org/abs/2210.00807v1
• Date: Mon, 3 Oct 2022 10:39:05 GMT
• Title: Portfolio optimization with discrete simulated annealing
• Authors: \'Alvaro Rubio-Garc\'ia and Juan Jos\'e Garc\'ia-Ripoll and Diego Porras
• Abstract summary: We present an integer optimization method to find optimal portfolios in the presence of discretized convex and non- convex cost functions. This allows us to achieve a solution with a given quality.
• Score: 0.0
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: Portfolio optimization is an important process in finance that consists in finding the optimal asset allocation that maximizes expected returns while minimizing risk. When assets are allocated in discrete units, this is a combinatorial optimization problem that can be addressed by quantum and quantum-inspired algorithms. In this work we present an integer simulated annealing method to find optimal portfolios in the presence of discretized convex and non-convex cost functions. Our algorithm can deal with large size portfolios with hundreds of assets. We introduce a performance metric, the time to target, based on a lower bound to the cost function obtained with the continuous relaxation of the combinatorial optimization problem. This metric allows us to quantify the time required to achieve a solution with a given quality. We carry out numerical experiments and we benchmark the algorithm in two situations: (i) Monte Carlo instances are started at random, and (ii) the algorithm is warm-started with an initial instance close to the continuous relaxation of the problem. We find that in the case of warm-starting with convex cost functions, the time to target does not grow with the size of the optimization problem, so discretized versions of convex portfolio optimization problems are not hard to solve using classical resources. We have applied our method to the problem of re-balancing in the presence of non-convex transaction costs, and we have found that our algorithm can efficiently minimize those terms.

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