Brandon Ogle Brandon Ogle -3 years ago 112
Python Question

SciPy optimization with grouped bounds

I am trying to perform a portfolio optimization that returns the weights which maximize my utility function. I can do this portion just fine including the constraint that weights sum to one and that the weights also give me a target risk. I have also included bounds for [0 <= weights <= 1]. This code looks as follows:

def rebalance(PortValue, port_rets, risk_tgt):
#convert continuously compounded returns to simple returns
Rt = np.exp(port_rets) - 1
covar = Rt.cov()

def fitness(W):
port_Rt = np.dot(Rt, W)
port_rt = np.log(1 + port_Rt)
q95 = Series(port_rt).quantile(.05)
cVaR = (port_rt[port_rt < q95] * sqrt(20)).mean() * PortValue
mean_cVaR = (PortValue * (port_rt.mean() * 20)) / cVaR
return -1 * mean_cVaR

def solve_weights(W):
import scipy.optimize as opt
b_ = [(0.0, 1.0) for i in Rt.columns]
c_ = ({'type':'eq', 'fun': lambda W: sum(W) - 1},
{'type':'eq', 'fun': lambda W: sqrt(np.dot(W, np.dot(covar, W))\
* 252) - risk_tgt})
optimized = opt.minimize(fitness, W, method='SLSQP', constraints=c_, bounds=b_)

if not optimized.success:
raise BaseException(optimized.message)
return optimized.x # Return optimized weights


init_weights = Rt.ix[1].copy()
init_weights.ix[:] = np.ones(len(Rt.columns)) / len(Rt.columns)

return solve_weights(init_weights)


Now I can delve into the problem, I have my weights stored in a MultIndex pandas Series such that each asset is an ETF corresponding to an asset class. When an equally weights portfolio is printed out looks like this:


Out[263]:
equity       CZA     0.045455
IWM 0.045455
SPY 0.045455
intl_equity EWA 0.045455
EWO 0.045455
IEV 0.045455
bond IEF 0.045455
SHY 0.045455
TLT 0.045455
intl_bond BWX 0.045455
BWZ 0.045455
IGOV 0.045455
commodity DBA 0.045455
DBB 0.045455
DBE 0.045455
pe ARCC 0.045455
BX 0.045455
PSP 0.045455
hf DXJ 0.045455
SRV 0.045455
cash BIL 0.045455
GSY 0.045455
Name: 2009-05-15 00:00:00, dtype: float64


how can I include an additional bounds requirement such that when I group this data together, the sum of the weight falls between the allocation ranges I have predetermined for that asset class?

So concretely, I want to include an additional boundary such that

init_weights.groupby(level=0, axis=0).sum()



Out[264]:
equity         0.136364
intl_equity 0.136364
bond 0.136364
intl_bond 0.136364
commodity 0.136364
pe 0.136364
hf 0.090909
cash 0.090909
dtype: float64


is within these bounds

[(.08,.51), (.05,.21), (.05,.41), (.05,.41), (.2,.66), (0,.16), (0,.76), (0,.11)]


[UPDATE]
I figured I would show my progress with a clumsy psuedo-solution that I am not too happy with. Namely becuase it doesn't solve the weights using the entire data set but rather asset class by asset class. The other issue is that it instead returns the series rather than the weights, But I am sure someone more apt than myself, could offer some insight in regards to the groupby function.

So with a mild tweak to my initial code, I have:

PortValue = 100000
model = DataFrame(np.array([.08,.12,.05,.05,.65,0,0,.05]), index= port_idx, columns = ['strategic'])
model['tactical'] = [(.08,.51), (.05,.21),(.05,.41),(.05,.41), (.2,.66), (0,.16), (0,.76), (0,.11)]


def fitness(W, Rt):
port_Rt = np.dot(Rt, W)
port_rt = np.log(1 + port_Rt)
q95 = Series(port_rt).quantile(.05)
cVaR = (port_rt[port_rt < q95] * sqrt(20)).mean() * PortValue
mean_cVaR = (PortValue * (port_rt.mean() * 20)) / cVaR
return -1 * mean_cVaR

def solve_weights(Rt, b_= None):
import scipy.optimize as opt
if b_ is None:
b_ = [(0.0, 1.0) for i in Rt.columns]
W = np.ones(len(Rt.columns))/len(Rt.columns)
c_ = ({'type':'eq', 'fun': lambda W: sum(W) - 1})
optimized = opt.minimize(fitness, W, args=[Rt], method='SLSQP', constraints=c_, bounds=b_)

if not optimized.success:
raise ValueError(optimized.message)
return optimized.x # Return optimized weights


The following one-liner will return the somewhat optimized series

port = np.dot(port_rets.groupby(level=0, axis=1).agg(lambda x: np.dot(x,solve_weights(x))),\
solve_weights(port_rets.groupby(level=0, axis=1).agg(lambda x: np.dot(x,solve_weights(x))), \
list(model['tactical'].values)))

Series(port, name='portfolio').cumsum().plot()


enter image description here

[Update 2]

The following changes will return the constrained weights, though still not optimal as it is broken down and optimized on the constituent asset classes, so when the constraint for target risk is considered only a collapsed version of the initial covariance matrix is avaliable

def solve_weights(Rt, b_ = None):

W = np.ones(len(Rt.columns)) / len(Rt.columns)
if b_ is None:
b_ = [(0.01, 1.0) for i in Rt.columns]
c_ = ({'type':'eq', 'fun': lambda W: sum(W) - 1})
else:
covar = Rt.cov()
c_ = ({'type':'eq', 'fun': lambda W: sum(W) - 1},
{'type':'eq', 'fun': lambda W: sqrt(np.dot(W, np.dot(covar, W)) * 252) - risk_tgt})

optimized = opt.minimize(fitness, W, args = [Rt], method='SLSQP', constraints=c_, bounds=b_)

if not optimized.success:
raise ValueError(optimized.message)

return optimized.x # Return optimized weights

class_cont = Rt.ix[0].copy()
class_cont.ix[:] = np.around(np.hstack(Rt.groupby(axis=1, level=0).apply(solve_weights).values),3)
scalars = class_cont.groupby(level=0).sum()
scalars.ix[:] = np.around(solve_weights((class_cont * port_rets).groupby(level=0, axis=1).sum(), list(model['tactical'].values)),3)

return class_cont.groupby(level=0).transform(lambda x: x * scalars[x.name])

Answer Source

After much time this seems to be the only solution that fits...

def solve_weights(Rt, b_ = None):

    W = np.ones(len(Rt.columns)) / len(Rt.columns)
    if  b_ is None:
        b_ = [(0.01, 1.0) for i in Rt.columns]
        c_ = ({'type':'eq', 'fun': lambda W: sum(W) - 1})
    else:
        covar = Rt.cov()
        c_ = ({'type':'eq', 'fun': lambda W: sum(W) - 1},
              {'type':'eq', 'fun': lambda W: sqrt(np.dot(W, np.dot(covar, W)) * 252) - risk_tgt})

    optimized = opt.minimize(fitness, W, args = [Rt], method='SLSQP', constraints=c_, bounds=b_)  

    if not optimized.success: 
        raise ValueError(optimized.message)

   return optimized.x  # Return optimized weights

class_cont = Rt.ix[0].copy()
class_cont.ix[:] = np.around(np.hstack(Rt.groupby(axis=1, level=0).apply(solve_weights).values),3)
scalars = class_cont.groupby(level=0).sum()
scalars.ix[:] = np.around(solve_weights((class_cont * port_rets).groupby(level=0, axis=1).sum(), list(model['tactical'].values)),3)

class_cont.groupby(level=0).transform(lambda x: x * scalars[x.name])
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