Optimization

Optimization is a term used in mathematics, computer science and economics. It refers to choosing the best available solution from a set of alternatives (variables). Optimization requires solving problems dealing with the maximization or minimization of a real function by taking into account all variables.

Suppose you are looking for the optimal investment strategy for your portfolio. You are able to invest in stocks and bonds (again, that's just an example - it doesn't take the existence of precious metals or alternative assets into account). The "function" is the possible future return, and the risk of the investment decision. You are restricted by the amount of money you are able to invest. The optimization process would look for the allocation of stock and bond investments in your portfolio that delivers the highest return at the lowest risk. One possible optimal solution might be to invest 30% of your money in stocks and 70% in bonds.