Stochastic network optimization models for investment planning

The authors describe and compare stochastic network optimization models for investment planning under uncertainty. Emphasis is placed on multiperiod asset allocation and active portfolio management problems. Myopic as well as multiple period models are considered. In the case of multiperiod models, the uncertainty in asset returns filters into the constraint coefficient matrix, yielding a multi-scenario program formulation. Different scenario generation procedures are examined. The use of utility functions to reflect risk bearing attitudes results in nonlinear stochastic network models. The authors adopt a newly proposed decomposition procedure for solving these multiperiod stochastic programs. The performance of the models in simulations based on historical data is discussed.