Active overweight constraint in portCons

I want to define active overweight. Formula is Max(0, Portwt - IndexWt) i.e. if a stk's wt in portfolio is 0.15 and in index it is 0.10, the active overwt is 0.05 whereas in a reverse scenario the active overwt is zero. This is done for each stk. The sum of this formula for all stks put together should not be more than say 0.3. How to incorporate this constraint in the portcons?

Answer 1

[Meet]

Hi Deepak,

You can define custom constraints using the "portcons" function by specifying the "ConstType" as "Custom". For example, I have structured a sample code with the constraints you mentioned for a portfolio of three stocks:

% Number of assets
NumAssets = 3;

% Portfolio weights and Index weights (example values)
PortWt = [0.15, 0.12, 0.08];
IndexWt = [0.10, 0.15, 0.05]; 

% Determine the active overweight constraint
A = zeros(1, NumAssets);
for i = 1:NumAssets
    if PortWt(i) > IndexWt(i)
        A(i) = 1; % Active overweight position
    else
        A(i) = 0;
    end
end

% Maximum allowable active overweight
b = 0.3;

% Constraint set using portcons
ConSet = portcons('Custom', A, b);

Hope this helps!!

Answer 2

[Alejandra Pena-Ordieres]

Hi Deepak,

First, I'd recommend using the Portfolio object instead of portcons. The Portfolio object is the most up-to-date functionality for portfolio optimization and it supports more constraints and workflows. See Portfolio Optimization Examples Using Financial Toolbox for some example problems that can be solved with the Portfolio object and its related methods.

In your case, you'd want to use the setOneWayTurnover method with BuyTurnover set to 0.3, SellTurnover set to [], and InitPort set to IndexWt.

p = Portfolio(AssetMean=assetMean,AssetCocar=assetCovar);
p = setOneWayTurnover(0.3,[],IndexWt);

Hope this heps,

Alejandra