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Bayesian Optimization for CVaR-based portfolio optimization

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  • Robert Millar
  • Jinglai Li

Abstract

Optimal portfolio allocation is often formulated as a constrained risk problem, where one aims to minimize a risk measure subject to some performance constraints. This paper presents new Bayesian Optimization algorithms for such constrained minimization problems, seeking to minimize the conditional value-at-risk (a computationally intensive risk measure) under a minimum expected return constraint. The proposed algorithms utilize a new acquisition function, which drives sampling towards the optimal region. Additionally, a new two-stage procedure is developed, which significantly reduces the number of evaluations of the expensive-to-evaluate objective function. The proposed algorithm's competitive performance is demonstrated through practical examples.

Suggested Citation

  • Robert Millar & Jinglai Li, 2025. "Bayesian Optimization for CVaR-based portfolio optimization," Papers 2503.17737, arXiv.org.
    • Handle: RePEc:arx:papers:2503.17737
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    File URL: http://arxiv.org/pdf/2503.17737
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