Bayesian Optimization for CVaR-based portfolio optimization

Optimal portfolio allocation is often formulated as a constrained risk problem, where one aims to minimize a risk measure subject to some performance constraints. This paper presents new Bayesian Optimization algorithms for such constrained minimization problems, seeking to minimize the conditional value-at-risk (a computationally intensive risk measure) under a minimum expected return constraint. The proposed algorithms utilize a new acquisition function, which drives sampling towards the optimal region. Additionally, a new two-stage procedure is developed, which significantly reduces the number of evaluations of the expensive-to-evaluate objective function. The proposed algorithm's competitive performance is demonstrated through practical examples.

Publication Details

Journal
ArXiv.org
Published
2025-03-22
Primary Topic
Risk and Portfolio Optimization
Type
article
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article

Bayesian Optimization for CVaR-based portfolio optimization

ArXiv.org
Risk and Portfolio Optimization
article

Bayesian Optimization for CVaR-based portfolio optimization

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Abstract

Optimal portfolio allocation is often formulated as a constrained risk problem, where one aims to minimize a risk measure subject to some performance constraints. This paper presents new Bayesian Optimization algorithms for such constrained minimization problems, seeking to minimize the conditional value-at-risk (a computationally intensive risk measure) under a minimum expected return constraint. The proposed algorithms utilize a new acquisition function, which drives sampling towards the optimal region. Additionally, a new two-stage procedure is developed, which significantly reduces the number of evaluations of the expensive-to-evaluate objective function. The proposed algorithm's competitive performance is demonstrated through practical examples.

ArXiv.org
Openalex Percentile: Top 42%
Risk and Portfolio Optimization
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