A Division of Windham Capital Management, LLC

Multi-period Optimization

Is the Windham Software able to cope with several periods? In specific, our holdings are generating annual positive cash flows (e.g., retail and real estate). Due to transaction costs involved with divestment, the main question in portfolio allocation is therefore how to invest this free liquidity every year. How would this be modeled?

We do not currently have a multi-period optimizer. There is a great deal of controversy over proper construction of such a tool in both the academic and practitioner world. We are continually researching this topic and it may become a feature in the future.

With the Windham Software, you are able to upload a current portfolio and identify a long term strategic portfolio with constraints. At the time of each cash flow you will invest in the assets that bring you closest to your objectives while meeting constraints using a combination of optimization, sensitivity analysis, and simulation. Most likely the model will direct the cash flows into assets with low correlation to the concentrated positions. This is a multi-step process that requires continuous refinement. Your goal is to reach equilibrium at the long term strategic asset allocation. Of course this may never be possible given the liquidity constraints and the continuous cash flows. At any given point in time this approach will generate conservative estimates of risk for the current portfolio if you are moving in the direction of a less concentrated portfolio. It will not consider the effects of reallocation to a lower risk portfolio at a later period. You could use a weighted average of the current and the long term strategic.

Category:Understanding the Software -> Optimization