Portfolio Optimization of 40 Stocks Using the D-Wave Quantum Annealer

(ARXIV.org) A research article by Jeffrey Cohen, Alex Khan, and Clark Alexander shares the results of their investigation of the use of quantum computers for building a portfolio out of a universe of U.S. listed, liquid equities that contains an optimal set of stocks. Starting from historical market data, the authors looked at various problem formulations on the D-Wave Systems Inc. D-Wave 2000Q(TM) System (hereafter called DWave) to find the optimal risk vs return portfolio; an optimized portfolio based on the Markowitz formulation and the Sharpe ratio, a simplified Chicago Quantum Ratio (CQR), then a new Chicago Quantum Net Score (CQNS). We approach this first classically, then by our new method on DWave. Our results show that practitioners can use a DWave to select attractive portfolios out of 40 U.S. liquid equities.
Two significant innovations: reformulated a classical ratio algorithm (Sharpe ratio) into a linear algorithm to fit onto a quantum annealer and receive comparable results. The second is we innovate significantly to build the QUBO, including affine transformation and scaling to improve annealing results.