CapitalAllocationLine.java

  1. package org.drip.portfolioconstruction.mpt;

  2. /*
  3.  * -*- mode: java; tab-width: 4; indent-tabs-mode: nil; c-basic-offset: 4 -*-
  4.  */

  5. /*!
  6.  * Copyright (C) 2020 Lakshmi Krishnamurthy
  7.  * Copyright (C) 2019 Lakshmi Krishnamurthy
  8.  * Copyright (C) 2018 Lakshmi Krishnamurthy
  9.  * Copyright (C) 2017 Lakshmi Krishnamurthy
  10.  * Copyright (C) 2016 Lakshmi Krishnamurthy
  11.  *
  12.  *  This file is part of DROP, an open-source library targeting analytics/risk, transaction cost analytics,
  13.  *      asset liability management analytics, capital, exposure, and margin analytics, valuation adjustment
  14.  *      analytics, and portfolio construction analytics within and across fixed income, credit, commodity,
  15.  *      equity, FX, and structured products. It also includes auxiliary libraries for algorithm support,
  16.  *      numerical analysis, numerical optimization, spline builder, model validation, statistical learning,
  17.  *      and computational support.
  18.  *  
  19.  *      https://lakshmidrip.github.io/DROP/
  20.  *  
  21.  *  DROP is composed of three modules:
  22.  *  
  23.  *  - DROP Product Core - https://lakshmidrip.github.io/DROP-Product-Core/
  24.  *  - DROP Portfolio Core - https://lakshmidrip.github.io/DROP-Portfolio-Core/
  25.  *  - DROP Computational Core - https://lakshmidrip.github.io/DROP-Computational-Core/
  26.  *
  27.  *  DROP Product Core implements libraries for the following:
  28.  *  - Fixed Income Analytics
  29.  *  - Loan Analytics
  30.  *  - Transaction Cost Analytics
  31.  *
  32.  *  DROP Portfolio Core implements libraries for the following:
  33.  *  - Asset Allocation Analytics
  34.  *  - Asset Liability Management Analytics
  35.  *  - Capital Estimation Analytics
  36.  *  - Exposure Analytics
  37.  *  - Margin Analytics
  38.  *  - XVA Analytics
  39.  *
  40.  *  DROP Computational Core implements libraries for the following:
  41.  *  - Algorithm Support
  42.  *  - Computation Support
  43.  *  - Function Analysis
  44.  *  - Model Validation
  45.  *  - Numerical Analysis
  46.  *  - Numerical Optimizer
  47.  *  - Spline Builder
  48.  *  - Statistical Learning
  49.  *
  50.  *  Documentation for DROP is Spread Over:
  51.  *
  52.  *  - Main                     => https://lakshmidrip.github.io/DROP/
  53.  *  - Wiki                     => https://github.com/lakshmiDRIP/DROP/wiki
  54.  *  - GitHub                   => https://github.com/lakshmiDRIP/DROP
  55.  *  - Repo Layout Taxonomy     => https://github.com/lakshmiDRIP/DROP/blob/master/Taxonomy.md
  56.  *  - Javadoc                  => https://lakshmidrip.github.io/DROP/Javadoc/index.html
  57.  *  - Technical Specifications => https://github.com/lakshmiDRIP/DROP/tree/master/Docs/Internal
  58.  *  - Release Versions         => https://lakshmidrip.github.io/DROP/version.html
  59.  *  - Community Credits        => https://lakshmidrip.github.io/DROP/credits.html
  60.  *  - Issues Catalog           => https://github.com/lakshmiDRIP/DROP/issues
  61.  *  - JUnit                    => https://lakshmidrip.github.io/DROP/junit/index.html
  62.  *  - Jacoco                   => https://lakshmidrip.github.io/DROP/jacoco/index.html
  63.  *
  64.  *  Licensed under the Apache License, Version 2.0 (the "License");
  65.  *      you may not use this file except in compliance with the License.
  66.  *  
  67.  *  You may obtain a copy of the License at
  68.  *      http://www.apache.org/licenses/LICENSE-2.0
  69.  *  
  70.  *  Unless required by applicable law or agreed to in writing, software
  71.  *      distributed under the License is distributed on an "AS IS" BASIS,
  72.  *      WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
  73.  *  
  74.  *  See the License for the specific language governing permissions and
  75.  *      limitations under the License.
  76.  */

  77. /**
  78.  * <i>CapitalAllocationLine</i> implements the Efficient Half-line created from the Combination of the Risk
  79.  * Free Asset and the Tangency Point of the CAPM Market Portfolio.
  80.  *
  81.  *  <br><br>
  82.  *  <ul>
  83.  *      <li><b>Module </b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/PortfolioCore.md">Portfolio Core Module</a></li>
  84.  *      <li><b>Library</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/AssetAllocationAnalyticsLibrary.md">Asset Allocation Analytics</a></li>
  85.  *      <li><b>Project</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/portfolioconstruction/README.md">Portfolio Construction under Allocation Constraints</a></li>
  86.  *      <li><b>Package</b> = <a href = "https://github.com/lakshmiDRIP/DROP/tree/master/src/main/java/org/drip/portfolioconstruction/mpt/README.md">Security Characteristic Capital Allocation Lines</a></li>
  87.  *  </ul>
  88.  * <br><br>
  89.  *
  90.  * @author Lakshmi Krishnamurthy
  91.  */

  92. public class CapitalAllocationLine
  93. {
  94.     private double _riskFreeRate = java.lang.Double.NaN;
  95.     private org.drip.portfolioconstruction.asset.PortfolioMetrics _tangencyPortfolioMetrics = null;

  96.     /**
  97.      * CapitalAllocationLine Constructor
  98.      *
  99.      * @param riskFreeRate The Risk Free Rate
  100.      * @param tangencyPortfolioMetrics The Tangency Portfolio Metrics
  101.      *
  102.      * @throws java.lang.Exception Thrown if the Inputs are Invalid
  103.      */

  104.     public CapitalAllocationLine (
  105.         final double riskFreeRate,
  106.         final org.drip.portfolioconstruction.asset.PortfolioMetrics tangencyPortfolioMetrics)
  107.         throws java.lang.Exception
  108.     {
  109.         if (!org.drip.numerical.common.NumberUtil.IsValid (_riskFreeRate = riskFreeRate) ||
  110.             null == (_tangencyPortfolioMetrics = tangencyPortfolioMetrics))
  111.         {
  112.             throw new java.lang.Exception ("CapitalAllocationLine Constructor => Invalid Inputs");
  113.         }
  114.     }

  115.     /**
  116.      * Retrieve the Risk-Free Rate
  117.      *
  118.      * @return The Risk-Free Rate
  119.      */

  120.     public double riskFreeRate()
  121.     {
  122.         return _riskFreeRate;
  123.     }

  124.     /**
  125.      * Retrieve the Tangency Portfolio Metrics
  126.      *
  127.      * @return The Tangency Portfolio Metrics
  128.      */

  129.     public org.drip.portfolioconstruction.asset.PortfolioMetrics tangencyPortfolioMetrics()
  130.     {
  131.         return _tangencyPortfolioMetrics;
  132.     }

  133.     /**
  134.      * Calculate the Combination Portfolio's Expected Returns from the corresponding Standard Deviation
  135.      *
  136.      * @param combinationPortfolioStandardDeviation The Combination Portfolio's Standard Deviation
  137.      *
  138.      * @return The Combination Portfolio's Expected Returns
  139.      *
  140.      * @throws java.lang.Exception Thrown if the Inputs are Invalid
  141.      */

  142.     public double combinationPortfolioExpectedReturn (
  143.         final double combinationPortfolioStandardDeviation)
  144.         throws java.lang.Exception
  145.     {
  146.         if (!org.drip.numerical.common.NumberUtil.IsValid (combinationPortfolioStandardDeviation))
  147.         {
  148.             throw new java.lang.Exception
  149.                 ("CapitalAllocationLine::combinationPortfolioExpectedReturn => Invalid Inputs");
  150.         }

  151.         return _riskFreeRate + combinationPortfolioStandardDeviation * (
  152.             _tangencyPortfolioMetrics.excessReturnsMean() - _riskFreeRate
  153.         ) / _tangencyPortfolioMetrics.excessReturnsStandardDeviation();
  154.     }

  155.     /**
  156.      * Compute the Combination Portfolio's Standard Deviation
  157.      *
  158.      * @param combinationPortfolioExpectedReturn The Expected Returns of the Combination Portfolio
  159.      *
  160.      * @return The Combination Portfolio's Standard Deviation
  161.      *
  162.      * @throws java.lang.Exception Thrown if the Inputs are Invalid
  163.      */

  164.     public double combinationPortfolioStandardDeviation (
  165.         final double combinationPortfolioExpectedReturn)
  166.         throws java.lang.Exception
  167.     {
  168.         if (!org.drip.numerical.common.NumberUtil.IsValid (combinationPortfolioExpectedReturn))
  169.         {
  170.             throw new java.lang.Exception
  171.                 ("CapitalAllocationLine::combinationPortfolioStandardDeviation => Invalid Inputs");
  172.         }

  173.         return (combinationPortfolioExpectedReturn - _riskFreeRate) / (
  174.             _tangencyPortfolioMetrics.excessReturnsMean() - _riskFreeRate
  175.         ) * _tangencyPortfolioMetrics.excessReturnsStandardDeviation();
  176.     }
  177. }