Portfolio optimization with structured products under return constraint

Abstract

A new approach for optimizing risk in a portfolio of financial instruments involving structured products is presented. This paper deals with a portfolio selection model which uses optimization methodology to minimize conditional Value-at-Risk (CVaR ) under return constraint. It focuses on minimizing CVaR rather than on minimizing value-at-Risk VaR, as portfolios with low CVaR necessarily have low VaR as well. We consider a simple investment problem where besides stocks and bonds, the investor can also include structured products into the investment portfolio. Due to possible intermediate payments from structured product, we have to deal with a re-investment problem modeled as a linear optimization problem.