Optimal deviations from an asset allocation

Institutional investors have long recognized that asset allocation is the most crucial decision required to achieve their investment goals. The basic asset allocation problem is to decide which asset classes to include in the investment portfolio and in what proportions. After having determining a ‘strategic benchmark portfolio’, a portfolio manager may wish to set tolerable limits within which individual asset class managers can vary. We model this problem mathematically as a convex optimization problem, and propose an algorithm to solve it. Numerical results are presented on an example problem, a set of randomly generated problems, and on two real-world investment problems taken from the literature.