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Inverse portfolio optimisation under constraints

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  • Rudi Zagst
  • Michaela Pöschik

Abstract

The purpose of this paper is to present results on inverse optimisation in the case of portfolios that have been optimised under constraints. Inverse optimisation yields implied views that represent investors' expectations on market performance. While literature mainly considers the unconstrained case, we will focus on views that can be derived from constrained portfolios. The implied views are derived in the form of spreads representing the loss of explanatory power with an increasing number of constraints. Applying the Black Litterman model allows the incorporation of the derived views as an additional source of information within the further asset allocation process.

Suggested Citation

  • Rudi Zagst & Michaela Pöschik, 2008. "Inverse portfolio optimisation under constraints," Journal of Asset Management, Palgrave Macmillan, vol. 9(3), pages 239-253, September.
    • Handle: RePEc:pal:assmgt:v:9:y:2008:i:3:d:10.1057_jam.2008.20
    DOI: 10.1057/jam.2008.20
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    References listed on IDEAS

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    1. Sharpe, William F., 1974. "Imputing Expected Security Returns from Portfolio Composition," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(3), pages 463-472, June.
    2. S Satchell & A Scowcroft, 2000. "A demystification of the Black–Litterman model: Managing quantitative and traditional portfolio construction," Journal of Asset Management, Palgrave Macmillan, vol. 1(2), pages 138-150, September.
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