The HiddenLevers Portfolio Optimizer attempts to maximize forward-looking expected return for a portfolio while not exceeding a target risk tolerance. This can help you find the best allocation for your current model, or rebalance a client's current holdings to meet a target risk tolerance. Here is a video walkthrough, and a step-by-step guide below:
Here's a step-by-step guide:
1. Navigate to the Risk Profile for the portfolio you'd like to optimize.
2. Under Portfolio Actions, select "Optimize."
3. Change the Risk Tolerance if needed. This is the parameter that the optimizer targets first, meeting the downside score you set.
4. Change Allocation Limits if you want. It will default to "Auto."
5. Change Scenarios if desired. The system will use the default scenarios you have set otherwise.
The model calculates expected return by running the HL stress test model against the portfolio in each of the scenarios, totaling expected return by using the individual probability of occurrence as described above. The optimizer optimizes for the expected return as described in (3), while adhering to the min/max allocation constraints for each position as set by the user.