Nonlinear Optimization with Financial Applications

From the reviews: "The book is intended for readers who have an understanding of linear algebra, and the Taylor mean value theorems in several variables. It presents numerical approaches to nonlinear optimization which typically have been applied for 30-40 years to practical problems in science and engineering. ... Summing up, one could say that the author had an interesting idea to present the classical algorithmic methods while teaching contemporary portfolio theory." (Leszek S. Zaremba, Zentralblatt MATH, Vol. 1083 (9), 2006) "This book is a timely and very useful addition to the literature on practical mathematical optimization. ... Indeed, the outstanding and almost unique aspect of the work is the thorough integration of the methods with application ... . The text is very readable and will be easy to teach from. The passion of the author for, and his fascination with, optimization are conveyed to the reader. His mathematically flavored poems, scattered throughout the text, entertain and amuse ... ." (Jan A. Snyman, SIAM Review, Vol. 48 (1), 2006) "This book contains many computational examples demonstrating the practical behavior of the proposed methods and their application to practical financial problems." (Mathematical Reviews, Zimmermann, K.)

List of Figures List of Tables Preface 1: PORTFOLIO OPTIMIZATION 1. Nonlinear optimization 2. Portfolio return and risk 3. Optimizing two-asset portfolios 4. Minimimum risk for three-asset portfolios 5. Two- and three-asset minimum-risk solutions 6. A derivation of the minimum risk problem 7. Maximum return problems 2: ONE-VARIABLE OPTIMIZATION 1. Optimality conditions 2. The bisection method 3. The secant method 4. The Newton method 5. Methods using quadratic or cubic interpolation 6. Solving maximum-return problems 3: OPTIMAL PORTFOLIOS WITH N ASSETS 1. Introduction 2. The basic minimum-risk problem 3. Minimum risk for specified return 4. The maximum return problem 4: UNCONSTRAINED OPTIMIZATION IN N VARIABLES 1. Optimality conditions 2. Visualising problems in several variables 3. Direct search methods 4. Optimization software and examples 5: THE STEEPEST DESCENT METHOD 1. Introduction 2. Line searches 3. Convergence of the steepest descent method 4. Numerical results with steepest descent 5. Wolfe's convergence theorem 6. Further results with steepest descent 6: THE NEWTON METHOD 1. Quadratic models and the Newton step 2. Positive definiteness and Cholesky factors 3. Advantages and drawbacks of Newton's method 4. Search directions from indefinite Hessians 5. Numerical results with the Newton method 7: QUASINEWTON METHODS 1. Approximate second derivative information 2. Rauk-two updates for the inverse Hessian 3. Convergence of quasi-Newton methods 4. Numerical results with quasi-Newton methods 5. The rank-one update for the inverse Hessian 6. Updating estimates of the Hessian 8: CONJUGATE GRADIENT METHODS 1. Conjugate gradients and quadratic functions 2. Conjugate gradients and general functions 3. Convergence of conjugate gradient methods 4.Numerical results with conjugate gradients 5. The truncated Newton method 9: OPTIMAL PORTFOLIOS WITH RESTRICTIONS 1. Introduction 2. Transformations to exclude short-selling 3. Results from Minrisk2u and Maxret2u 4. Upper and lower limits on invested fractions 10: LARGER-SCALE PORTFOLIOS 1. Introduction 2. Portfolios with increasing numbers of assets 3. Time-variation of optimal portfolios 4. Performance of optimized portfolios 11: DATA-FITTING AND THE GAUSS-NEWTON METHOD 1. Data fitting problems 2. The Gauss-Newton method 3. Least-squares in time series analysis 4. Gauss-Newton applied to time series 5. Least-squares forms of minimum-risk problems 6. Gauss-Newton applied to Minrisk1 and Minrisk2 12: EQUALITY CONSTRAINED OPTIMIZATION 1. Portfolio problems with equality constraints 2. Optimality conditions 3. A worked example 4. Interpretation of Lagrange multipliers 5. Some example problems 13: LINEAR EQUALITY CONSTRAINTS 1. Equality constrained quadratic programming 2. Solving minimum-risk problems as EQPs 3. Reduced-gradient methods 4. Projected gradient methods 5. Results with methods for linear constraints 14: PENALTY FUNCTION METHODS 1. Introduction 2. Penalty functions 3. The Augmented Lagrangian 4. Results with P-SUMT and AL-SUMT 5. Exact penalty functions 15: SEQUENTIAL QUADRATIC PROGRAMMING 1. Introduction 2. Quadratic/linear models 3. SQP methods based on penalty functions 4. Results with AL-SQP 5. SQP line searches and the Maratos effect 16: FURTHER PORTFOLIO PROBLEMS 1. Including transaction costs 2. A re-balancing problem 3. A sensitivity problem 17: INEQUALITY CONSTRAINED OPTIMIZATION 1. Portfolio problems with inequality constraints 2. Optimality conditions 3. Transforming inequalities to equalities 4. Transforming inequalities to simple bounds 5. Example