Chapter 8. Optimization

Optimization is a way of selecting the best solution out of all feasible solutions. So, the first part of optimization is to formulate the problem according to given constraints, and to apply an advanced analytical method to get the best solution and help in making better decisions.

Optimization models play a pivotal role in quant and computational finance by solving complex problems more efficiently and accurately. Problems associated with asset allocation, risk management, option pricing, volatility estimation, portfolio optimization, and construction of index funds can be solved using optimization techniques such as nonlinear optimization models, quadratic programming formulations, and integer programming models. There is a variety of commercial and open source software available in the analytical space to solve these problems, and R is one of the preferred choices as it is open source and efficient.

In this chapter, we will be discussing some of the optimization...