Risk Target Optimization

Dec 8, 2009

As an alternative to mean-variance portfolio optimization, Barra Optimizer offers users an option to run risk target optimization. Instead of risk being controlled implicitly with the risk aversion parameters, the risk target is explicitly specified by the user. When the risk target is achievable and efficient, the optimized portfolio will have risk (or tracking error) equal to the specified target. The risk target may be too low due to the problem constraints; it may also be too high, that is, not achievable due to the constraints; or it may not be efficient due to the transaction costs and/or asset returns.