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Welcome to the Portfolio-Optimize wiki!
Construct a Socially Responsible Investment Portfolio
Construct and rebalance investment portfolios using the Portfolio Optimization service using data from the Investment Portfolio service.
Emerging Technologies
Construct portfolios the right way using the same capabilities as the quants, with a simplified interface for personal and advisor usage. Tap into the growing demand in the industry to incorporate an individual's unique constraints and preferences such as socially responsible investing. This developer Journey shows you how to construct a request to the Portfolio Optimization service using portfolios stored in the Investment Portfolio service to create (or rebalance) a portfolio that retains the risk and return properties of a benchmark.
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This developer journey demonstrates how to configure a request to the Portfolio Optimization service to create a custom investment portfolio that matches the risk and return properties of a selected benchmark.
The Bluemix Investment Portfolio service enables you to store, update, and query investment portfolios and associated holdings through API calls. This service can hold a set of client portfolio which we wish to rebalance, a set of benchmark portfolios whose properties we'd like to match, and a set of eligible investments we'd like to use in our analysis.
The Bluemix Portfolio Optimization service uses a linear optimization framework in order to find the best combination of assets that meet a given set of criteria. This can be used for portfolio construction and rebalancing on both an absolute (e.g. minimizing risk and maximizing return) and relative basis (e.g. with respect to another portfolio).
This journey walks the users through the steps of a standard use case of creating (or rebalancing) an investment portfolio to minimize tracking error, or the difference between your portfolio and a standardized one, known as a benchmark. We walk through the collection and payload construction of constraints - such as aversion to "sin stocks", socially responsible investment weighting, and general allocation requirements.This journey also includes a simplified user interface we've designed to better collect this information from the user, and display the resulting trades that need to be made to arrive at the optimized, socially responsible set of investments.
“According to your results, we’ve classified you as a ‘medium-risk’ individual”, the registered investment advisor (RIA) says to you with a smile. Having recently answered a questionnaire about your risk tolerances prior to your first meeting with your new advisor, you are offered the firm’s “Moderate Risk Portfolio” replete with stocks, bonds, ETFs, and mutual funds. This set of investments has a risk and return profile consistent with the firm’s definition of ‘moderate’.
As you peruse the contents, you mention that you just can’t stomach the idea of giving your hard-earned money to companies who sell tobacco, given your mother’s recent bout with lung cancer. The advisor could certainly remove such securities from the portfolio, but doing so may alter the properties of the collection in unanticipated ways – perhaps the tobacco stocks provided a diversification benefit, or brought down the average risk or buoyed the projected returns. The portfolio was constructed holistically, so any individual modifications not taking into account the behavior of the whole portfolio could modify its properties such that it no longer meets your needs.
Portfolio construction – as this process is aptly referred to - was formerly the purview of the quants. As the tools to facilitate the process tend to be complex, and sometimes expensive, portfolio construction tends to be a centralized process that yields a very small number of options to the firm’s entire client base. Until now. Never before has the investment management industry been able to provide this sophisticated functionality to users on the front lines who deal directly with customers. This developer journey shows how a user can leverage the same tools used by the centralized quants to construct an optimal portfolio, and therefore can take into account each individual customer’s unique preferences.
You’ll create a simple web app that collects information from the user – be it the customer themselves or an empowered advisor (or robo-advisor) – that constructs the necessary payload to form a request to the Portfolio Optimization service. Once we have the user’s portfolio and target investment profile, known as the benchmark, we’ll construct a portfolio that meets all of a user’s constraints while matching the properties of the benchmark as closely as possibly, therefore creating their own custom portfolios. This application leverages four types of constraints to choose from: • Hard constraints: Securities you just can’t fathom investing in, sometimes known as “sin stocks”, including alcohol, tobacco, fossil fuels, military, and gambling. • ESG constraints: Leverage socially responsible investing themes by skewing the contents of the portfolio to include companies that have strong principles of governance, sustainability, environmental stewardship, low controversy, and social impact. • Allocation constraints: Traditional requirements such as asset class preferences (e.g. 30/70 stocks/bonds), industry sectors, and geographic breakdowns. • Result requirements: Further constrain the problem to prevent short selling, provide minimum (maximum) number of trades or position weights.
When you complete this journey, you should have a pretty good understanding of how to: • Manage sets of eligible investments, current portfolios and benchmarks within the Investment Portfolio service. • Dynamically populate a web app form given information on the securities eligible for the analysis. • Construct a payload to be run using the Portfolio Optimization service. • Use the Portfolio Optimization service to compare and contrast optimization results to determine suitability of the constructed portfolio.
With this set of tools, a new generation of advisors and investors can be empowered to facilitate their own portfolio construction. This developer journey provides the foundation of how this capability might be deployed or baked in to more advanced workflows.