Chapter 4. Optimization and Portfolio Selection
In Part 1, Hal Forsey presents a new Forsey–Sortino optimizer that generates a mean–downside risk efficient frontier. Part 2 develops a secondary optimizer that finds the best combination of active managers (to add value) and passive indexes (to lower costs). For the latest research in this area, we recommend the book Optimizing Optimization, by Stephen Satchell at Cambridge University (Elsevier, 2009).
It is important for the reader to understand the assumptions that apply to all optimizers before I discuss the development of Sortino Investment Advisors’ portfolio selection routines. Utility theory1
provides a backdrop for discussing the limitations of mathematics ...