Bayesian Optimization for CVaR-based portfolio optimization

ArXiv ID: 2503.17737 “View on arXiv”

Authors: Unknown

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.

Keywords: Bayesian Optimization, Conditional Value-at-Risk (CVaR), Portfolio allocation, Constrained optimization, Risk management, Multi-asset

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 6.5/10
• Quadrant: Holy Grail
• Why: The paper employs advanced mathematical concepts including Bayesian Optimization, Gaussian Processes, and risk measures like CVaR, requiring dense derivations and formal theorems. It also includes practical numerical examples and algorithm performance comparisons, indicating strong empirical implementation and data-driven validation.

  flowchart TD
    A["Research Goal: Minimize CVaR<br>for portfolio optimization"] --> B["Input: Historical Asset Returns &<br>Minimum Expected Return Constraint"]
    B --> C["Methodology: Bayesian Optimization<br>with new acquisition function"]
    C --> D{"Two-stage evaluation<br>procedure?"}
    D -- Yes --> E["Reduced evaluations of<br>expensive CVaR function"]
    D -- No --> F["Standard CVaR<br>evaluations"]
    E --> G["Key Outcomes: Achieved<br>optimal risk allocation<br>with fewer computations"]
    F --> G
    G --> H["Result: Competitive performance<br>demonstrated in practical examples"]