Quantum-Inspired Portfolio Optimization Using Reinforcement Learning for Dynamic Stock Allocation

Abstract

Despite the dynamic nature of the market, large dimensionalities of asset space and varieties of financial products, portfolio optimization is a highly challenging problem. These traditional methods like Markowitz Mean-Variance Optimization and Risk Parity are highly static, and have not been able to adjust to the speed-of-change in market regimes. In this paper, the authors present a new Quantum-Inspired Portfolio Optimization (QIPO-RL) model that combines these interesting approaches to create a framework for a Reinforcement Learning (RL) based dynamic stock allocation algorithm. The framework blends quantum-inspired search techniques, an adaptive RL agent, and asset weights to maximize risk-adjusted asset returns, while maintaining assets in optimal allocation, and provides a way to rebalance a portfolio continuously in response to the changing market environment. The results from experiments were compared with state of the art baselines, which showed that QIPO-RL’s annual return is 16.8%, its Sharpe ratio is 1.61, and the maximum drawdown is 11.5% which is the best among all the competing methods. These findings support the synergism of using a global search method inspired by quantum computers in conjunction with an RL-based adaptation of decisions.