Setting an Investment Problem
In order to use the Optimizer, you must set an investment problem. This involves either overwriting the default case, loading a previously prepared Estimator or Optimizer case, or entering a case manually. An Optimizer case must contain a list of assets, a correlation matrix, and estimates of risk and return. An Estimator case includes all of these basic inputs. There are also numerous optional inputs. Optional inputs range from constraints to the currently used portfolio.
Entering a case is sometimes easier if you start with empty worksheets, instead of the default case. Click the New Button in the File Section of the ribbon to open an empty Optimizer case. Piece together your case by loading files, copying data from other spreadsheets, or entering data manually. Just remember that you must have a list of assets, a correlation matrix, and estimates of risk and return.
After a case is loaded there are many follow-up activities that you may need or want to perform:
- Review preferences and options that control what the Optimizer does and how it calculates the results.
- Group assets.
- Add, sort, or specify assets in the Asset Selector.
- Enter a risk free rate.
- Decide on a multi-period horizon.
- Add expense ratios and yields/another characteristic (for reference, constraint construction, and taxes).
- Evaluate the assets based on the information ratio.
- Set up portfolios. Several features require an initial portfolio.
- Add constraints.
- Include taxes.
- Enter puts and calls if desired.
- Enable or disable optimization options, such as active weight optimization and long-short optimization, in the Options Menu.
Next, enter optimization inputs: the number of simulations (or tolerance) and the forecast confidence level. Then, initiate optimization. After reviewing results, consider post-optimization. Later, use the Optimizer for monitoring and rebalancing your portfolios and consult the Trade Advisor for trade guidance. The Info Worksheet summarizes many of these choices in one location for your review.