2014

OptiFolio
Portfolio Optimization and Simulation Software

User's Guide
Updated: June 15th, 2014

www.risk-o.com

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USER'S GUIDE

CONTENTS
I. OVERVIEW .......................................................................................................................................... 3
I.1. TYPICAL WORKFLOW USING OPTIFOLIO........................................................................................................ 3
I.2. OVERVIEW OF PROGRAM FEATURES ............................................................................................................ 4
II. IMPORTING DATA AND CONFIGURING OPTIFOLIO ............................................................................ 9
II.1. CONFIGURING HISTORICAL PRICES IN AN MS EXCEL WORKSHEET .................................................................... 9
II.2. IMPORTING MARKET PRICES FROM MS EXCEL OR DELIMITED FILES ................................................................. 9
II.3. IMPORTING MARKET PRICES FROM THE WEB .............................................................................................. 10
II.4. PARAMETERS CONFIGURATION ................................................................................................................ 12
III. THE DATA MANAGER ...................................................................................................................... 13
III.1. ASSET PRICES, RETURNS, AND STATISTICS.................................................................................................. 13
III.1.A. Historical prices ...................................................................................................................... 13
III.1.B. Asset returns ........................................................................................................................... 14
III.1.C. Return statistics ...................................................................................................................... 15
(i) Editing assumptions .................................................................................................................................. 16
(ii) Positive definiteness ................................................................................................................................. 18

III.1.D. Adjusted returns ..................................................................................................................... 19

III.2. RETURNS BEST-FIT ............................................................................................................................... 19
III.3. MONTE CARLO SIMULATION FOR INDIVIDUAL ASSETS ................................................................................. 21
IV. PORTFOLIO OPTIMIZATION ............................................................................................................ 22
IV.1. FEASIBLE INVESTMENT AREA BASED ON EXHAUSTIVE PORTFOLIO COMBINATIONS .............................................. 22
IV.2. FEASIBLE INVESTMENT AREA BASED ON A STOCHASTIC-GENETIC MODEL ......................................................... 23
IV.3. THE CONDITIONAL VAR (CVAR)/EXPECTED RETURN MODEL ....................................................................... 23
IV.4. OPTIMUM PORTFOLIO WEIGHTS ............................................................................................................. 25
IV.5. EFFICIENT FRONTIER ............................................................................................................................ 25
IV.5.A. Tabular frontier ...................................................................................................................... 25
IV.5.B. Graphic frontier ...................................................................................................................... 26
IV.6. INTERACTIVE PORTFOLIO NAVIGATION AND SELECTION ON THE EFFICIENT FRONTIER .......................................... 27
IV.7. INTERACTIVE EXPERIMENT WITH A SIMPLE PORTFOLIO OF THREE ASSETS ......................................................... 29
IV.7.A. Experimenting with the diversification effect ......................................................................... 29
IV.7.B. Experimenting with two assets: VaR and CVaR features........................................................ 30
IV.7.C. Experimenting with three assets: VaR and CVaR features ..................................................... 31
V. GROUPS AND LIMITS ....................................................................................................................... 34
V.1. ASSET GROUPS .................................................................................................................................... 34
V.2. INVESTMENT LIMITS .............................................................................................................................. 35
V.3. PORTFOLIO BENCHMARKS ...................................................................................................................... 37
V.3.A. Assets turnover ........................................................................................................................ 37
V.3.B. Risk and Return limits .............................................................................................................. 37
V.4. ASSET LIMITS REPORT ............................................................................................................................ 38
VI. THE PORTFOLIO MANAGER ............................................................................................................ 39

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USER'S GUIDE

I. OVERVIEW
OptiFolio allows you to conduct constrained portfolio optimization using both the Modern Portfolio
Theory approach (the Markowitz-Sharpe model) and the contemporary Conditional VaR model.
Furthermore, OptiFolio makes it easy to apply Monte Carlo Simulations in order to generate forecasted
scenarios for assets and portfolio values. The application provides you with a user-friendly interface
where you can change your assumptions, create and edit user portfolios, explore each point of the
efficient frontier, and much more.

I.1. Typical workflow using OptiFolio

This is a brief summary of the typical workflow in OptiFolio.

Fig.1: OptiFolio typical workflow

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I.2. Overview of program features

OptiFolio generates Risk/Return charts that show feasible investment portfolios and find optimum asset
weights. Furthermore, asset grouping and constraints can be applied to the optimization problem. It is also
possible to manually enter portfolios, change statistical assumptions, and conduct Monte Carlo
Simulations for the forecasted value of assets and portfolios.
Here we present a compact version of a typical OptiFolio session.

Load historical prices data from an MS Excel workbook, delimited file, or from the web.

Fig.2: Main Ribbon

Configure the basic parameters for the analysis.

Fig.3: Parameters configuration

OptiFolio automatically calculates and displays:

o

Historical prices charts and tables for each asset.

Historical returns according to the holding period configured by the user.

Various return statistics, such as mean returns, covariances, and correlations, which can
be calculated from data, pasted from the clipboard, or manually edited.

The Bootstrapping for each variable (best-fit to a statistical distribution).

The Monte Carlo Simulation, which forecasts the future performance for each asset.

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Fig.4: Historical prices graph

Optimize portfolios with Markowitz-Sharpe or Return/Conditional VaR charts. OptiFolio

depicts all feasible portfolios on the Risk/Return or CVaR/Return plane using either exhaustive
combinations or a stochastic combinations model.

Fig.5: Markowitz-Sharpe chart

OptiFolio finds the optimum portfolios with maximum Sharpe ratio and minimum standard
deviation or maximum expected Return/CVaR and minimum CVaR according to each chart
type. Additionally it calculates every point of the efficient frontier and displays them in a table or
in a chart.

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Fig.6: Efficient frontier - Tabular format

Fig.7: Efficient frontier - Graphic format

OptiFolio allows the user to define asset groups and limits for the portfolio. Groups and limits
are also stored in human readable files.

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Fig.8: Asset groups

This is an example of a feasible investment area including constraints.

Fig.9: Markowitz-Sharpe chart with restrictions

The user can interactively explore the optimum asset combinations along the efficient frontier, as
shown below. Portfolios of interest can be saved to the Portfolio Manager by double-clicking.

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Fig.10: Markowitz-Sharpe chart with constraints - Interactive efficient frontier

Manage user-defined portfolios, calculate statistics, and conduct Monte Carlo Simulations.

Fig.11: Portfolio Manager window

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II. IMPORTING DATA AND CONFIGURING OPTIFOLIO

II.1. Configuring historical prices in an MS Excel worksheet
The structure of the historical data matrix in MS Excel should be as follows:

The first row should contain the headings for each column.

The first column (A) should contain the date for each price observation.

The following columns should contain the historical prices for each asset, all expressed in the
same currency.

There should be no empty cells inside the data matrix.

Fig.12: Configuring data in MS Excel

II.2. Importing market prices from MS Excel or delimited files

In order to import data from MS Excel, use the Load prices from XLS file button on the ribbon. Then
select the MS Excel file containing the historical prices data.

Fig.13: Main Ribbon

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If the workbook contains more than one spreadsheet, select the appropriate worksheet from the list. If the
workbook has only one, it will be selected automatically.If the number of assets is greater than 255, a flat
file (Comma-Separated orTab-Delimited) should be used instead of an MS Excel formatted file.

II.3. Importing market prices from the web

Prices can be downloaded from an appropriately configured web server. You can manually select the
appropriate URL configuration or let OptiFolio auto-configure an available source.
The main screen shows the list of assets, reflecting which historical prices will be downloaded. Only the
checked assets will be taken into account during the download process. Furthermore, you can edit the list,
adding or removing assets using the Add new... or Remove buttons.

Fig.14: Load prices from the web

Fig.15: Adding assets to download from the web

The asset list will be saved into the Optifolio.ini file, so the next time the program is opened, the list will
appear as on the previous session.

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By default, OptiFolio will try to auto-configure an available data source for your region and contract
type. You can manually introduce the connection parameters by pressing the Configure... button.
In order to configure a connection, first check if there are any available auto-configurable sources on the
drop-down. Select the auto-configurable source and press OK to the make the configuration active.
Alternatively, manually enter the connection parameters (source name, help URL, general information
access URL, and historical prices URL). OptiFolio will replace the following variables with their
appropriate values before invoking the download procedure:
%1 ................ Asset symbol or ID
%2 ................ Initial date month number (011)
%3 ................ Initial date day number (131)
%4 ................ Initial date year number (4 digits)
%5 ................ Ending date month number (011)
%6 ................ Ending date day number (131)
%7 ................ Ending date year number (4 digits)
%8 ................ Frequency indicator letter (d for daily, w for weekly)
The web page is expected to return the following information in comma-separated format:

For historical prices queries, two columns.

o The date: yyyy-mm-dd(- can be any non-comma delimiter).
o The historical price for the corresponding date, using decimal point notation (xxxx.xx).
For general information queries, one column.
o The asset name: name (surrounding characters are omitted).

Fig.16: Configuring a web data source

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II.4. Parameters configuration

The Configure Parameters button gives you access to the following parameters:

Fig.17: Parameters configuration

Risk-free rate
The annualized risk-free rate indicates the return on a risk-free asset (such as a US Treasury
Bill). This value will be used to calculate the risk premium (the excess return of an asset or
portfolio above the risk-free rate) and the Sharpe ratio.

Number of days per year

All returns will be calculated using the Holding-Period entered by the user inside the Data
Manager. However, when an annual figure is required, OptiFolio will use this assumed number
of days per year (DPY). For example, a daily risk-free rate would be calculated as:

(1 YearlyRFR )

1
DPY

CVaR Significance level

This rate is used to calculate the Conditional VaR. Usual values are 1% and 5%.

Number of simulated paths

This is the number of simulated price paths for the Monte Carlo analysis.

Show individual assets

If this option is checked, individual asset marks will be added to the Risk/Return charts.

Color palette
Choose a color palette to represent portfolio densities on each feasible combination of risk and
return.

All changes made on the parameters window will be automatically saved into the Optifolio.ini file
when the program is closed. This file will be loaded the next time OptiFolio is opened.

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III. THE DATA MANAGER

III.1. Asset prices, returns, and statistics
III.1.A. Historical prices
Use the Data Manager to browse, edit, and produce information about prices, returns, general statistics,
and a Monte Carlo Simulation for asset prices.
Enter the Historical prices tab to get time series charts for each asset and enter the Historical prices
table tab to get the assets list with each price point of the chart. Both the chart and table may be copied to
the clipboard by right-clicking on them.

Fig.18: Historical prices graph

To zoom in on a section of a chart, left click and drag the mouse pointer downwards. To return to the
default zoom level, click and drag upwards.

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III.1.B. Asset returns

The asset returns tab shows three important parameters for the analysis:

Holding period (in working days)

All internal return calculations will be carried out for a time span equal to the holding period. In
other words, all returns, mean returns, and covariances will be expressed for the holding period
(see example below).

Fig.19: Asset returns tab

Price comparison distance and unit

When calculating returns from prices, each return will be calculated by comparing two prices: an
initial price and an ending price. This parameter controls the distance between each pair or prices
used to calculate returns. The distance may be measured in working days or in physical
observations (see example below).

Return calculation technique

Returns may be calculated using geometric or logarithmic returns. The geometric formula for the
return (r) is the following, considering the prices (P), the comparison distance (L), the Holding
Period (HP), and the working days distance between the compared prices (T).
HP

P
rt ( t ) T 1
Pt L

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While the logarithmic version is the following:

rt Ln(

Pt
HP
)
Pt L T

Pressing the Recalculate returns and update all statistics button will regenerate all internal returns and
return statistics matrices (means, covariances, correlations). This should usually be done each time one of
the Asset returns parameters is changed.
Return calculation:Example
st

nd

Lets assume that the first loaded prices correspond to the following dates:February 1 , 2 ,
th
and4 .Assume that the Holding Period is three working days, the price comparison distance
is one physical observation, and the calculation technique is geometric.
nd

st

The first return would be calculated comparing Feb 2 vs. Feb 1 (one physical observation
apart, one working day apart in this case) and would express the result for three working
days, as follows:

rFeb 2 (

PFeb 2
PFeb 1

)1 1
th

nd

The second return would be calculated comparing Feb 4 vs. Feb 2 (one physical
observation apart, two working days apart in this case) and would express the result for
three working days, as follows:

rFeb 4 (

PFeb 4
PFeb 2

3
2

) 1

III.1.C. Return statistics

In the Return statistics tab, OptiFolio shows the (1) mean returns, (2) return covariances, and (3) return
correlations.

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Fig.20: Return statistics: Historical and Expected

The Mean returns tab also contains the expected return vector. This vector is initially taken from
historical means, but it may be configured by the user.
The covariances and correlations matrices are interlinked. When any covariance or correlation changes,
a corresponding change will be automatically carried out on the other matrix in order to keep both
matrices consistent with each other.
Remember that expected returns and covariances are the main inputs for the portfolio optimization
models.

(i) Editing assumptions

By default, statistics are calculated from the historical returns. If you change the values for the assumed
statistics and want to restore historical values, simply press the Assume historical button.
If instead of typing, you prefer to paste assumptions from an external matrix, use the Paste values
button.
The Assume independency button is used to assume zero correlations (and covariances) among assets.
Only variances will be taken into consideration under this scenario
For instance, in this chart the correlation between assets 1 and 3 is 0.5166. If this correlation is manually
changed to, say, 0.2, the diversification power between this pair of assets will increase and the feasible
investment area will expand to the left, as shown in the next figure.

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Fig.21: Chart with high correlation between assets 1 and 3

Fig.22: Chart with lower correlation between assets 1 and 3

If the same correlation is reduced even more, to -0.5 for instance, the chart will expand even further, as
expected.

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Fig.23: Chart with negative correlation between assets 1 and 3

(ii) Positive definiteness

The positive definiteness of the covariance matrix is evaluated each time a correlation or covariance
assumption is changed. A positive definite matrix exhibits a green label on the upper right corner, as
shown below. Otherwise, a red warning will appear at the same place.

Fig.24: Return covariances

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III.1.D. Adjusted returns

The Adjusted returns matrix shown on the Asset Returns tab contains a transformation of the
historical returns. This transformed return series is calculated in such a way that:

They have the same dates and data length in comparison to the historical return matrix
Each column has a mean return equal to the expected mean return
Each column has a variance equal to the assumed variance for that variable

This data is used by the CVaR/Return portfolio optimization model as the raw data for the historical
CVaR calculation.
The general formula employed to transform each column (X) in order to achieve target statistics is:

At (

X t Mean(XHist )
) XTarget E(X)Target
XHist

Fig.25: Adjusted returns

III.2. Returns best-fit

Bootstrapping means finding the best-fitting distribution for a certain dataset. In this case, the datasets
are the historical returns for each asset. This analysis is always carried out assuming a 1-day holding
period, because the 1-day returns will be later linked and compounded in order to forecast the asset
performance for longer terms.
Each row shows the best distribution for each asset, together with the best parameters for the distribution.
OptiFolio considers two possible distributions: Normal and Students-t. The Anderson-Darling (AD) is
also shown on the table. AD values lower than 0.75 indicate that the distribution is a suitable candidate

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for the asset. Remember that not all assets may have a good fit to a smooth distribution, such as Normal
or T. In fact, it is very common to find assets that will not fit any known distribution.

Fig.26: Best-fitresults

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III.3. Monte Carlo Simulation for individual assets

The Monte Carlo Simulation is processed using the best-fitted distributions of the bootstrapping process
for each asset.
In this tab, after pressing the Forecast button, a series of forecasted return vectors are generated (as
many as were configured on the Parameters window) using random numbers from the corresponding
distribution. For each possible returns vector, a value path is calculated. Once all value paths have been
estimated, a chart showing the median value and critical percentiles (1%, 5%, 95%, and 99%) is shown.
The chart will go as far as indicated by the Horizon value (in working days).

Fig.27: Monte Carlo Simulation for one asset

The results of the chart may also be found in tabular form on the Price simulation table tab.
The Copy paths button will copy the detail of each of the simulated value paths. Note that the amount
of information copied to the clipboard may be considerable depending on the number of requested
scenarios and the horizon of the simulation.

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IV. PORTFOLIO OPTIMIZATION

To create Markowitz-Sharpe and Return/Conditional VaR charts, click on the Portfolio optimization
button on the Main Ribbon. There are two chart types (models) and two methodologies to depict all
feasible portfolios on the Risk/Return plane:

Chart types: Markowitz-Sharpe Model and Expected Return/Conditional VaR model

Portfolio simulation methods: exhaustive combinations and Stochastic-Genetic method.

IV.1. Feasible investment area based on exhaustive portfolio combinations

The first methodology used to draw the complete profile of the feasible area examines alternative
portfolios formed using a systematic rule to distribute weights uniformly.
For instance, given two assets, all portfolios (0%, 100%), (1%, 99%)(99%, 1%), and (100%, 0%)
would be included on the chart. The level of detail would increase as the simulation advances. Therefore,
on a second pass, portfolios (0.1%, 99.9%), (0.2%, 99.8%), and so on would be tested.
Press the Start simulation button to begin analyzing feasible portfolios. The simulation can reach speeds
of several million portfolios per second. Therefore, the chart and especially the efficient frontier should
adopt a defined shape rapidly. Press the Stop simulation button once you are satisfied with the level of
detail. Note that the chart generation will not end automatically.

Fig.28: Markowitz-Sharpe chart with exhaustive combinations method

Colors shown in the graph represent the relative density of portfolios on each Risk/Return combination
(this means that in hotter areas there are many portfolios with different internal weights that produce
the same combination of risk and return). The chart can be copied by right-clicking and selecting the copy
option.

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IV.2. Feasible investment area based on a Stochastic-Genetic model

The second methodology used to draw the complete profile of the feasible area examines alternative
portfolios formed using random weights (assuming long positions for all assets). The random distribution
that generates these weights has been specially calibrated in order to explore as much as possible the
feasible investment area (not only the central part, but also the extremes).
This particular kind of simulation shows the internal structure of the chart, composed by several simpler
feasible areas and curves that arise from combinations of two, three, and more assets. Again, the color
shows the relative density of portfolios on the chart.

Fig.29: Markowitz-Sharpe chart with Stochastic-Genetic model

IV.3. The Conditional VaR (CVaR)/Expected Return model

In the Markowitz model, the portfolio (risk, return) coordinates are calculated using the Expected
Standard Deviation and Expected return for the portfolio (horizontal and vertical, respectively). The
formula is:

[ E ( Risk p ), E (Re turn p )] [ E ( p ), E (rp )] [

w j wk E( j ,k ) , w j E(rj )]
j 1 k 1

j 1

Note that this model is essentially parametric. In other words, it directly uses the expected returns and
covariances in order to estimate the portfolio statistics.
On the CVaR/Return model, the risk measure is not the standard deviation but the portfolio Conditional
Value-at-Risk (CVaR). In this case, the CVaR is calculated using the historical simulation method,
employing the Adjusted Returns discussed in the Data Manager section.

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The relevant formulas are presented here. Assume that given a vector of asset weights w, and a matrix
of adjusted returns AR, the hypothetical adjusted return vector of the portfolio is Rp:

R p w AR
Then, the Value-at-Risk of this vector with a significance level of

would be:

VaR( Rp , ) Percentile ( , Rp )
Hence, the Conditional Value-at-Risk of the vector will be:

CVaR ( R p , )

p
R p VaR ( RP , )

R p VaR ( RP , )

The portfolio coordinates for the CVaR/Return model will then be:
n

[ E ( Risk p ), E (Re turn p )] [ E (CVaR p ), E (rp )] [CVaR ( w AR, ), w j E (rj )]

j 1

This is an example of the CVaR/Return chart.

Fig.30: Return/Conditional VaR chart with exhaustive combinations method

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IV.4. Optimum portfolio weights

Once the user finishes the simulation, the optimum portfolio weights can be reviewed on the second tab.
Weights for both minimum standard deviation portfolio and maximum Sharpe ratio are shown for the
Markowitz-Sharpe chart, and minimum CVaR and maximum Expected Return/CVaR are shown for the
Return/Conditional VaR.

Fig.31: Portfolio optimization weights

OptiFolio has the option to savethese portfolios to the Portfolio Manager by using the buttons located
on the blue options bar.

IV.5. Efficient frontier

The last tab shows the detailed composition of the portfolios located on the efficient frontier. Select the
desired number of portfolios and OptiFolio will split the frontier into the corresponding number of nodes.
IV.5.A. Tabular frontier
The first four columns of the table show the basic statistics for each portfolio, while the rest of columns
exhibit the asset weights needed to reach that point.
You may copy the table to the clipboard by right-clicking on it. You can also add specific frontier
portfolios to the Portfolio Manager by right-clicking on them.

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Fig.32: Efficient frontier results

IV.5.B. Graphic frontier

The graphic representation of the frontier shows the weights of the portfolios along the frontier. From left
to right, the portfolios increase in terms of total risk.

Fig.33: Efficient frontier results

In order to get a better understanding of the chart, you can use the context menu to select among six
different color schemes.

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IV.6. Interactive portfolio navigation and selection on the efficient frontier

Once the drawing sequence has been finished, move the mouse over any frontier portfolio and OptiFolio
will show a floating window containing the following information: (1) the three assets with the highest
weights in the portfolio, (2) a pie chart showing the relative weights of those three assets (sorted), as well
as the rest of the portfolio, and (3) the key Risk and Return statistics for the selected portfolio.

Fig.34: Efficient frontier results

Fig.35: Efficient frontier results

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Any frontier portfolio can be saved to the Portfolio Manager for further analysis by double-clicking onto
it.

Fig.36: Saved portfolio in the Portfolio Manager

You can also hover the mouse over any pure asset to see its name and coordinates.

Fig.37: Pure asset information

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IV.7. Interactive experiment with a simple portfolio of three assets

This module allows you to interactively play with generic three-assets portfolios in order to demonstrate
some of the features of the Mean-Variance and the CVaR models.
IV.7.A. Experimenting with the diversification effect
You can use this chart as a simple aid to give an academic explanation of how the diversification works.
The chart shows three pure assets and their intermediate portfolios on the Expected Return (vertical axis)
and Expected Standard Deviation (horizontal axis) plane. The assets coordinates and inter-asset
correlations can be adjusted by the user. However, remember that this simulation only takes into account
the pair-wise diversification effects; the three-assets efficient frontier is probably closer to left side of the
graphic.
The default chart shows three assets located at risk-return combinations given by coordinates (10%, 5%),
(17%, 24%) and (20%, 12%) respectively. Inter-asset correlations are initially set at 1.0, so there are no
diversification effects and asset 3 is dominated by some combinations of 1 and 2.

Fig.38: Experimenting - Default asset locations and correlations (no diversification)

By moving the correlations sliders and the asset points themselves, you can set a broad spectrum of
configurations, such as the one shown below. You can copy the chart contents by right-clicking and
selecting 'Copy'.

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Fig.39: Experimenting - New asset locations and correlations (high diversification)

IV.7.B. Experimenting with two assets: VaR and CVaR features

The VaR and CVaR values behave very differently when confronted with progressive portfolio
rebalancing. This can be seen very clearly in the following charts, that show the VaR and CVaR results
for a portfolio with two assets when the weight of the first asset is assumed to change from 0% to 100%
in small intervals. In this example, the VaR shows several local minima and no clear global minimum.

Fig.40: Experimenting - VaR for different combinations of two assets

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In contrast, CVaR shows a well behaved pattern with a unique minimum.

Fig.41: Experimenting - VaR vs CVaR for different combinations of two assets

IV.7.C. Experimenting with three assets: VaR and CVaR features

The previous experiment can be easily extended to a three-assets portfolio, as shown below.

Fig.42: Experimenting - VaR surface for different combinations of three assets

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CVaR exhibits a smooth surface with one global optimum point, contrasting the chaotic surface of the
VaR statistic.

Fig.43: Experimenting - CVaR surface for different combinations of three assets

Fig.44: Experimenting - VaR surface for different combinations of three assets

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Fig.45: Experimenting - CVaR surface for different combinations of three assets

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V. GROUPS AND LIMITS

Press the Groups and limits button in order to configure different asset groups and limits for the
portfolio.

V.1. Asset groups

In the first tab, asset categories and groups can be constructed by clicking on the New category or
New group button and choosing each one of the assets for the portfolio. To keep any changes to the
group, click on the Keep changes button after creating it.
Take into account that categories are just helpers used to organize groups. Categories do not have any
special meaning for the optimization process. You may work with only one group category if you prefer.

Fig.46: Asset groups

In the right corner, there is an option to load the groups that have been previously created, and next to it,
there is a button to save the groups. Groups can be loaded from three different data sources, as shown
below:

Fig.47: Asset groups source file

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Here you can see an example of the simple internal structure of these files.

Fig.48: Asset groups in MS Excel

V.2. Investment limits

In the second tab, investment limits (also known as position constraints) can be implemented. The limits
can also be arranged into categories like the Asset groups.
Limits can be defined with great flexibility, using the parameters explained below. To confirm any
change made to a limit, click on the Keep changes button.

Fig.49: Investment limits

The various limit parameters are:

Limit target kind

A limit can be applied to the position of an asset group (as a whole), to the weight of every asset
in a group, or to a single asset.

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Limit target object

Select the limited object (group or asset) on the first drop-down list

Limit sign
Select the limit sign (<= or >=) on the second drop-down list

Weight or comparison value

Enter the limit weight or the referred comparison weight (of another asset or group).

Limit multiplied
If a comparison weight was selected, the multiplier will be applied to the comparison weight
before evaluating the limit.

Limit disabling
Check the final box in order to disable a limit instead of deleting it. Of course, you can enable it
later.

Like the asset groups, limits can also be saved and loaded from files. Refer to the provided examples to
see the detailed structure of the limits file.
Remember that portfolio optimizations must be run again in order to consider any change made to the
investment limits (or groups).

Fig.50: Markowitz-Sharpe chart with exhaustive combinations method with constraints

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V.3. Portfolio benchmarks

This form allows you to set additional constraints to the portfolio related to asset turnover and global risk
statistics.
V.3.A. Assets turnover
By using this feature, you can select a reference portfolio (the drop-down list will show all portfolios that
appear in the Portfolio Manager). The limit will be referred to as the difference in absolute weights
between the feasible portfolio and the reference portfolio. Differences can be measures either individually
or in total:

Limit to individual asset turnover. The limit will be compared to the maximum asset-wise
difference in weights between the candidate portfolio and the reference portfolio. In other words,
the maximum allowable absolute weight difference in any asset will be the entered percentage.

Limit to total asset turnover. The limit will be compared to the sum of asset-wise differences in
weights between the candidate portfolio and the reference portfolio. In other words, the total
weight differences along the portfolio will not exceed the entered percentage.

Fig.51: Portfolio benchmarks configuration

V.3.B. Risk and Return limits

By enabling this feature, the feasible portfolios will be confined to a certain region of minimum and
maximum expected return and risk. The risk measure will depend on the current model: either Standard
Deviation or Conditional Value-at-Risk.

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V.4. Asset limits report

This report shows the effective limits associated to each asset as far as can be statically deduced from the
limit structure. This table provides relevant information regarding the intersection of limits. However, it
is not possible to evaluate the impact of all limits in advance (consider, for example, a group limit
referred to the weight of another group).

Fig.52: Asset limits report

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VI. THE PORTFOLIO MANAGER

The Portfolio Managerallows the user to create and manage specific portfolios for further analysis.
Custom portfolios may have user-defined weights. Portfolios can be saved or loaded from data files in a
similar fashion to asset groups and limits. Please refer to the provided examples in order to see the
detailed structure of the portfolio files.

Fig.53: Portfolio Manager - Composition report

The Portfolio composition tab shows the portfolio weights in graphic and tabular form. The table report
may be edited by the user in order to set new weights for the assets. This tab also presents the portfolio
composition by asset groups.

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Fig.54: Portfolio Manager - Composition table

Fig.55: Portfolio Manager - Composition by asset group

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In the Return statistics tab, the user can access relevant information regarding each portfolio, such as the
expected return, Sharpe ratio, CVaR, etc.
As a reference, the CVaR is presented using the non-parametric method described in a previous section
and also under a normal distribution assumption (i.e. assuming that instead of calculating the adjusted
vector return percentiles, the critical value can be estimated based on a normal distribution with the same
mean and standard deviation in comparison to the vector of adjusted returns).

Fig.56: Portfolio statistics

The Limit status tab presents a summary of the limits compliance for each portfolio. The status of each
limit is clearly labeled on the last column.

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Fig.57: Portfolio limit status

Finally, the Monte Carlo Simulation tab allows the user to conduct a Monte Carlo Simulation on the
forecasted value of the portfolio. For this purpose, the current value of the portfolio is assumed to be 100.

Fig.58: Portfolio Manager window- Monte Carlo Simulation

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After pressing the Forecast button, a forecasted return matrix is generated (containing as many random
scenarios as is configured on the Parameters window) using random numbers from a multivariate
elliptical copula that combines the distributions for each asset. This copula considers the inter-variable
correlations as well as the individual parameters. For each possible returns scenario, a value path is
calculated. Once all value paths have been estimated, a chart showing the median value and critical
percentiles (1%, 5%, 95%, and 99%) is shown. The chart will go as far as indicated by the Horizon value
(in working days).
The results of the chart may also be found in tabular form on the Price simulation table tab.
The Copy paths button will copy the detail of each of the simulated value paths. Note that the amount
of information copied to the clipboard may be considerable depending on the number of requested
scenarios and the horizon of the simulation.

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