The Sortino Framework for Constructing Portfolios

Chapter 4. Optimization and Portfolio Selection

Hal Forsey

Executive Summary

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).

Introduction

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 ...