In a recent paper, researchers from Multiverse Computing, Protiviti and Ally Financial demonstrate how to apply non-linear cardinality constraints, important for real-world asset management, to quantum portfolio optimization. This approach enables them to tackle non-convex portfolio optimization problems using quantum annealing that would otherwise be challenging for classical algorithms.
Being able to use cardinality constraints for portfolio optimization opens the doors to new applications for creating innovative portfolios and exchange-traded-funds (ETFs). They apply the methodology to the practical problem of enhanced index tracking and are able to construct smaller portfolios that significantly outperform the risk profile of the target index whilst retaining high degrees of tracking.