Black-Litterman Portfolio Optimization with Noisy Intermediate-Scale Quantum Computers

Abstract: In this work, we demonstrate a practical application of noisy intermediate-scale quantum (NISQ) algorithms to enhance subroutines in the Black-Litterman (BL) portfolio optimization model. As a proof of concept, we implement a 12-qubit example for selecting 6 assets out of a 12-asset pool. Our approach involves predicting investor views with quantum machine learning (QML) and addressing the subsequent optimization problem using the variational quantum eigensolver (VQE). The solutions obtained from VQE exhibit a high approximation ratio behavior, and consistently outperform several common portfolio models in backtesting over a long period of time. A unique aspect of our VQE scheme is that after the quantum circuit is optimized, only a minimal number of samplings is required to give a high approximation ratio result since the probability distribution should be concentrated on high-quality solutions. We further emphasize the importance of employing only a small number of final samplings in our scheme by comparing the cost with those obtained from an exhaustive search and random sampling. The power of quantum computing can be anticipated when dealing with a larger-size problem due to the linear growth of the required qubit resources with the problem size. This is in contrast to classical computing where the search space grows exponentially with the problem size and would quickly reach the limit of classical computers.