Post-Optimization
Post-Optimization polishes the optimal portfolio produced by the optimization process to produce a portfolio that is both practical to invest and near to optimal. You can think about it as the Optimizer's rounding capability, but it is more complicated than that. Specifically, running New Frontier's post-optimization algorithms adjusts the optimal portfolios according to the investability constraints, choosing the nearest such portfolios to the optimal frontier portfolios. The resulting portfolios are referred to within the application as “investable”.
"Nearness" is determined by a portfolio distance metric, which is the tracking error, or the variance of the difference between the optimal and investable portfolios. This choice of metric means that moving portfolio weight between highly correlated assets will incur less penalty than moving weight between less correlated ones, and moving weight toward an asset with smaller standard deviation will reduce the penalty, all other things held equal.
Set the length of time that you want post-optimize to run on the Optimization Tab of the Preferences Window. This allows you to force a more thorough or quicker post-optimization depending on your goals. The default length of time is based on the problem size, but is also greater than or equal to 120 seconds. ote that this option only controls the time spent on the actual post-optimization, not on pushing the information into the fields, so post-optimization may feel longer than the set time. Moving the slider all the way to the right will select an unlimited time for post-optimization; this option will fully explore all possibilities before returning the nearest result that satisfies the post-optimization constraints and conditions.
Please note that though post-optimization is available when the options strategy is enabled, it will not use the options-overlaid means and variance. Thus caution should be exercised with postoptimizing, in order to avoid drastically altering the portfolios with extreme investability constraints.
To view the results, click the View Investable Button on the Results Worksheet. You can also select portfolios according to set criteria on the Filters Worksheet, just click on the View Investable Button. You also can examine the investable portfolios in many charts.
The Investability Constraints Worksheet includes a table that enables the post-optimization of a portfolio selected by the user. This is intended to allow the post-optimization of reference portfolios or a portfolio picked by an exact filter. Copy the portfolio you want to post-optimize into the Target Column (or enter it manually). Click the Post-Optimize Target Button. The Investable Column populates with the investable version (complies with the investable constraints as described above) of the target portfolio. The Difference Column shows the impact of the post-optimization along with turnover and tracking error. You can also copy a regularly post-optimized portfolio from the Results Worksheet for the same analysis. This method of running post-optimize can save time since it is applying the procedure to just one portfolio instead of the entire frontier.
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