Decision-focused Sparse Tangent Portfolio Optimization
Haeun Jeon, Seunghoon Choi, Hyunglip Bae, Yongjae Lee, Woo Chang Kim
Abstract
Sparse tangent portfolio optimization aims to learn an interpretable, low-cardinality portfolio in the tangency direction of the mean-variance frontier. However, the associated cardinality-constrained formulation is NP-hard, and standard predict-then-optimize pipelines often misalign forecasting accuracy with downstream portfolio quality. We propose an end-to-end decision-focused learning framework that reformulates Sharpe ratio maximization as a Disciplined Parametrized Programming (DPP)-compliant convex programming layer and replaces discrete selection with a smooth top- operator enforcing an exact cardinality . This enables gradient flow through prediction, asset selection, and re-optimization, allowing the predictive model to directly optimize portfolio performance. Across four major equity markets, our method achieves competitive and often superior out-of-sample Sharpe ratios compared with historical and prediction-focused baselines, with particularly strong gains in larger asset universes. Our code is publicly available.
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Builds on2
- Decision-Focused Learning without Decision-Making: Learning Locally Optimized Decision LossesSanket Shah, Kai Wang, Bryan Wilder, Andrew Perrault et al.NeurIPS 2022 · 79 citations
- A Globally Optimal Portfolio for m-Sparse Sharpe Ratio MaximizationYizun Lin, Zhao-Rong Lai, Cheng LiNeurIPS 2024 · 8 citations
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