Load aware optimization

• US 20020002521A1
• Filed: 02/23/2001
• Published: 01/03/2002
• Est. Priority Date: 02/23/2000
• Status: Active Grant

• Current Assignee: Edelman Financial Engines LLC
• Original Assignee: Financial Engines Incorporated (Edelman Financial Engines LLC)
• Inventors: Watson, John G., Scott, Jason S., Shearer, James W.
• Granted Patent: US 7,249,081 B2
• Time in Patent Office: Days
• US Class Current: 705/36
• CPC Class Codes: G06Q 10/04 Forecasting or optimisation specially adapted for administrative or management purposes, e.g. linear programming or "cutting stock problem" market predictions or forecasting for commercial activities G06Q30/0202
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/10 Tax strategies

Abstract

A process utilizing a modification to the inputs to a standard portfolio optimization is provided for facilitating load aware optimizations. First, each loaded financial product, such as a mutual fund having a front end or back end load, of a set of available financial products is modeled as a loaded portion and an unloaded portion by determining an adjusted return. The adjusted return is based on a period the load bearing financial product is projected to be held in a portfolio and the amount of the load. A variable relating the fraction of a loaded financial product in the portfolio may be decomposed into two variables (one representing the loaded portion and another representing the unloaded portion) to regain the quadratic programming problem. The optimization may then be performed using quadratic programming techniques, and the fraction of each loaded financial product in the portfolio is calculated by combining the two variables.

Claims

1. A method of selecting a recommended portfolio of one or more financial products, the method comprising:

determining an adjusted return for each load-bearing financial product of the set of financial products based on a predetermined holding period, the current holdings in the load-bearing financial product, information regarding expected future contributions to or withdrawals from the load bearing financial product, the expected return of each load-bearing financial product, and the amount of load associated with each load-bearing financial product; and

generating the recommended portfolio of one or more financial products from the set of financial products in varying proportions based upon the adjusted return of each load-bearing financial product and the expected return of each financial product that is not load-bearing.

2. The method of claim 1, wherein one or more levels of risk may be specified by a user, indicating the user'"'"'s risk tolerance, and wherein said generating the recommended portfolio is additionally based on a user'"'"'s risk tolerance.

3. The method of claim 1, wherein said generating the portfolio is additionally based upon the covariance of returns relating to the set of financial products.

4. The method of claim 3, wherein said generating of the portfolio includes using quadratic programming techniques to determine the proportions of load-bearing and load-free financial products that maximize the expected value of the utility from the portfolio, where the utility function is adequately approximated by a linear combination of the portfolio'"'"'s expected return and variance of return.

5. The method of claim 2, wherein the level of risk corresponds to measures of volatility in a financial product'"'"'s or a portfolio'"'"'s monetary value in response to changes in market conditions.

6. A method of reallocating a portfolio of one or more financial products, the method comprising:

determining whether the portfolio includes a loaded financial product;

decomposing a fraction relating to the relative amount of the loaded financial product currently held in the portfolio into three terms, the first term being a known value representing a portion of the loaded financial product that is currently held in the portfolio, the second term being a variable representing a portion of the of the loaded financial product that may be sold in order to generate the recommended portfolio from the portfolio, and a third term being a variable representing a portion of the loaded financial product that may be purchased in order to generate the recommended portfolio from the portfolio and from a set of available financial products;

determining an adjusted return for each loaded financial product of the set of available financial products and each loaded financial product contained within the portfolio based on a predetermined period of time, the expected return of each load bearing financial product, and the amount of load associated with each load bearing financial product;

generating the recommended portfolio of one or more financial products from the available set of financial products and from one or more financial products in the portfolio based on the predetermined period of time, the current holdings in each load bearing financial product, information regarding expected future contributions to or withdrawals from each load bearing financial product, and the expected return of each financial product that is not load bearing.

7. The method of claim 6, wherein a fraction relating to the relative amount of the loaded financial product proposed to be held in the recommended portfolio is decomposed into three terms, a first term being the known portion of the loaded financial product that is a specified lower/upper bound fraction representing a minimum/maximum portion of the loaded financial product that is recommended to be obtained in the recommended portfolio, a second term being a variable representing the portion of the of the loaded financial product that is above/below the lower/upper bound and is immune to an initial load fee, and a third term being a variable representing the portion of the of the loaded financial product that is above/below the lower/upper bound and is subject to an initial load fee.

8. The method of claim 7, wherein the first term associated with the recommended portfolio is based upon a user specified minimum or maximum allowed portion of a loaded financial product.

9. The method of claim 6, wherein said generating a new portfolio includes using quadratic programming techniques to determine the proportions of load-bearing and load-free financial products that maximize the expected value of the utility from the portfolio, where the utility function is adequately approximated by a linear combination of the portfolio'"'"'s expected return and variance of return.

10. The method of claim 9, wherein said generating a new portfolio is additionally based upon the covariance of returns relating to the set of financial products.

11. The method of claim 9, wherein one or more levels of risk may be specified by a user, indicating the user'"'"'s risk tolerance, and wherein said generating the recommended portfolio is additionally based on a user'"'"'s risk tolerance.

12. A method of reallocating a portfolio of one or more financial products, the method comprising:

modeling each loaded financial product of the one or more financial products in terms of at least a loaded portion and an unloaded portion;

calculating an adjusted return for each loaded financial product based on the expected return of each loaded financial product, a predetermined holding period, the current holdings in each loaded financial product, information regarding expected future contributions to or withdrawals from each loaded financial product, and a load fee associated with each financial product; and

generating the reallocated portfolio based upon the adjusted returns and the expected returns.

13. A method of financial product selection comprising:

calculating a plurality of adjusted returns for loaded financial products of the set of financial products, the plurality of adjusted returns describing the performance of the loaded financial products to account for a load applied to the loaded financial products;

modeling each loaded financial product of the other financial products in an optimal portfolio in terms of at least a loaded portion and an unloaded portion, the loaded portion'"'"'s performance described in terms of an associated expected return of the plurality of expected returns, and the unloaded portion'"'"'s performance described in terms of an associated adjusted return of the plurality of adjusted returns; and

generating one or more portfolios of financials products from the set of financial products in varying proportions based upon the plurality of expected returns of the set of financial products that are not loaded, the expected returns of the unloaded portions, the adjusted returns of the loaded financial products of the group of financial products, and the adjusted returns of the loaded portions.

14. The method of claim 13, wherein one or more levels of risk may be specified by a user, indicating the user'"'"'s risk tolerance, and wherein said generating the recommended portfolio is additionally based on a user'"'"'s risk tolerance.

15. The method of claim 14, wherein said generating one or more portfolios of financial products further comprises using quadratic programming techniques to determine combinations of financial products, loaded portions of the loaded financial products, and unloaded portions of the loaded financial products in varying proportions that have the highest expected return for a given level of risk.

16. The method of claim 13, wherein said generating one or more portfolios of financial products is additionally based upon covariance information relating to the set of financial products.

17. The method of claim 13, wherein said modeling each loaded financial product further includes representing at least one of the loaded financial products of the other financial products as a sum of three terms, one of which indicates a minimum or maximum portion that each of the financial products should contribute to the optimal portfolio.

18. A machine-readable medium having stored thereon data representing sequences of instructions, which when executed by a processor, cause the processor to:

determine an adjusted return for each load-bearing financial product of the set of available financial products based on a predetermined holding period, the current holdings in the load-bearing financial product, information regarding expected future contributions to or withdrawals from the load bearing financial product, the expected return of each load-bearing financial product, and the amount of load associated with each load-bearing financial product; and

generate a recommended portfolio of one or more financial products from the set of available financial products in varying proportions based upon the adjusted return of each load-bearing financial product and the expected return of each financial product that is not load-bearing.

19. A computer system comprising:

a processor; and

a computer readable-medium containing instructions that when executed cause the processor to

calculate a plurality of adjusted returns for loaded financial products of the set of financial products, the plurality of adjusted returns describing the performance of the loaded financial products to account for a load applied to the loaded financial products,

represent each loaded financial product of the other financial products in an optimal portfolio in terms of at least a loaded portion and an unloaded portion, the loaded portion'"'"'s performance described in terms of an associated expected return of the plurality of expected returns, and the unloaded portion'"'"'s performance described in terms of an associated adjusted return of the plurality of adjusted returns, and

generate one or more portfolios of financials products from the set of financial products in varying proportions based upon the plurality of expected returns of the set of financial products that are not loaded, the expected returns of the unloaded portions, the adjusted returns of the loaded financial products of the group of financial products, and the adjusted returns of the loaded portions.