setBudget

Set up budget constraints for portfolio

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Syntax

obj = setBudget(obj,LowerBudget)
obj = setBudget(obj,LowerBudget,UpperBudget)

Description

obj = setBudget(obj,LowerBudget) sets up budget constraints for Portfolio, PortfolioCVaR, or PortfolioMAD objects. For details on the respective workflows when using these different objects, see Portfolio Object Workflow, PortfolioCVaR Object Workflow, and PortfolioMAD Object Workflow.

Note

setConditionalBudget supports the Undertakings for Collective Investment in Transferable Securities (UCITS) directive for Portfolio, PortfolioCVaR, and PortfolioMAD objects. The UCITS asset allocation regulation states that funds can only invest up to 10% in a single issuer, and that investments in excess of 5% must not exceed 40% of the total portfolio. This is known as the 5/10/40 rule.

example

obj = setBudget(obj,LowerBudget,UpperBudget) sets up budget constraints for portfolio objects with an additional option for UpperBudget.

example

Examples

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Open Live Script

Assume you have a fund that permits up to 10% leverage, which means that your portfolio can be from 100% to 110% invested in risky assets. Given a Portfolio object p, set the budget constraint. 

p = Portfolio;
p = setBudget(p, 1, 1.1);
disp(p.LowerBudget);
     1

disp(p.UpperBudget);
    1.1000
Open Live Script

Assume you have a fund that permits up to 10% leverage, which means that your portfolio can be from 100% to 110% invested in risky assets. Given a CVaR portfolio object p, set the budget constraint. 

p = PortfolioCVaR;
p = setBudget(p, 1, 1.1);
disp(p.LowerBudget);
     1

disp(p.UpperBudget);
    1.1000
Open Live Script

Assume you have a fund that permits up to 10% leverage, which means that your portfolio can be from 100% to 110% invested in risky assets. Given PortfolioMAD object p, set the budget constraint. 

p = PortfolioMAD;
p = setBudget(p, 1, 1.1);
disp(p.LowerBudget);
     1

disp(p.UpperBudget);
    1.1000

This example uses:

Open Live Script

Define mean and covariance of risk asset returns. 

m = [ 0.05; 0.1; 0.12; 0.18; ];
C = [ 0.0064 0.00408 0.00192 0,; 
    0.00408 0.0289 0.0204 0.0119,;
    0.00192 0.0204 0.0576 0.0336,;
   0 0.0119 0.0336 0.1225];

Create a Portfolio object defining the risk-free rate. 

p = Portfolio('RiskFreeRate',0.03, 'assetmean', m, 'assetcovar', C, ...
'lowerbudget', 1, 'upperbudget', 1, 'lowerbound', 0);

Create multiple Portfolio objects with different budgets on risky assets. By defining the risky assets, you can control how much is invested in a risk-free asset.

p = setBudget(p, 1, 1);    % allow 0% risk-free asset allocation, meaning fully invested in risky assets
p1 = setBudget(p, 0, 1);   % allow 0 to 100% risk-free asset allocation
p2 = setBudget(p, 0.7, 1);  % allow 0 to 30% risk-free asset allocation

plotFrontier(p); hold on; 
plotFrontier(p1);hold on;
plotFrontier(p2);
legend('Without risk-free asset', 'With risk-free asset in range [0,1]', 'With risk-free asset in range [0, 0.3]', 'location', 'best');

Figure contains an axes object. The axes object with title Efficient Frontier, xlabel Standard Deviation of Portfolio Returns, ylabel Mean of Portfolio Returns contains 3 objects of type line. These objects represent Without risk-free asset, With risk-free asset in range [0,1], With risk-free asset in range [0, 0.3].

setBudget defines the bound for total weights for the allocated risky assets, and the remaining is automatically the bound for a risk-free asset. Use setBudget to control the level of allowed allocation to a risk-free asset. For additional information on using setBudget with a risk-free asset, see Leverage in Portfolio Optimization with a Risk-Free Asset.

Input Arguments

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Object for portfolio, specified using Portfolio, PortfolioCVaR, or PortfolioMAD object. For more information on creating a portfolio object, see

Data Types: object

Lower-bound for budget constraint, specified as a scalar for a Portfolio, PortfolioCVaR, or PortfolioMAD input object (obj).

Note

Given bounds for a budget constraint in either LowerBudget or UpperBudget, budget constraints require any portfolio in Port to satisfy:

LowerBudget <= sum(Port) <= UpperBudget

One or both constraints may be specified. The usual budget constraint for a fully invested portfolio is to have LowerBudget = UpperBudget = 1. However, if the portfolio has allocations in cash, the budget constraints can be used to specify the cash constraints. For example, if the portfolio can hold between 0% and 10% in cash, the budget constraint would be set up with 

obj = setBudget(obj, 0.9, 1)

Data Types: double

Upper-bound for budget constraint, specified as a scalar for a Portfolio, PortfolioCVaR, or PortfolioMAD input object (obj).

Note

Given bounds for a budget constraint in either LowerBudget or UpperBudget, budget constraints require any portfolio in Port to satisfy:

LowerBudget <= sum(Port) <= UpperBudget

One or both constraints may be specified. The usual budget constraint for a fully invested portfolio is to have LowerBudget = UpperBudget = 1. However, if the portfolio has allocations in cash, the budget constraints can be used to specify the cash constraints. For example, if the portfolio can hold between 0% and 10% in cash, the budget constraint would be set up with 

obj = setBudget(obj, 0.9, 1)

Data Types: double

Output Arguments

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Updated portfolio object, returned as a Portfolio, PortfolioCVaR, or PortfolioMAD object. For more information on creating a portfolio object, see

More About

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Tips

You can also use dot notation to set up the budget constraints.

obj = obj.setBudget(LowerBudget, UpperBudget);

Version History

Introduced in R2011a

See Also

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