Risk free rate in portfolio allocation tool?

Bob Peticolas26 декабря 23 г. | Опубликовано в Общая

I understand risk parity allocation and the risk free rate does not play into that. Just experimenting, varied the risk-free rate for the other two methods of allocation, and it does not seem to change the allocations at all. Is the risk-free rate here just an artifact of a re-used form from elsewhere on the site or does it really serve some purpose here? Thanks for any info.

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Dmitry Shevchenko27 декабря 23 г.

Hey Bob, which objectives you've chosen for your portfolio optimization? Just a heads up, not all objectives consider the risk-free rate in their calculations. For instance, Sharpe, Omega, or Sortino do include the risk-free rate, but others like minimizing volatility or maximizing utility don't. We probably need to add some clarification about this in the settings form or disable the risk-free input based on the selected objective.

Bob Peticolas28 декабря 23 г.

My apology for being unclear, Dmitry. I was on . I have long used risk parity to determine position size, so I was surprised to see an input field for a risk-free rate, but it may be used in some other position-sizing option on that page. I'm just trying to understand the options. Thanks.

Dmitry Shevchenko28 декабря 23 г.

Yeah, we've recently introduced the risk-free input option in the optimization settings. If you choose the Omega ratio or Sortino ratio as your risk measures for optimization, the risk-free rate will be taken into consideration, as both the Sortino and Omega formulas include it. Previously, this option was always set to zero, and we only exposed it in a recent platform update.

Note that this setting doesn’t affect the optimization results if you select volatility, Ulcer Index, or CVaR as your risk measures as calculations of these measures do not include a risk-free rate.

Bob Peticolas29 декабря 23 г.

Thanks Dmitry. I have calculated my own risk parity position sizing using standard deviations of returns, so I was puzzled that a risk-free rate input showed up. I understand better.

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