Article ID: | iaor1998806 |
Country: | Netherlands |
Volume: | 79 |
Issue: | 1 |
Start Page Number: | 85 |
End Page Number: | 94 |
Publication Date: | Nov 1994 |
Journal: | European Journal of Operational Research |
Authors: | Meade N., Adcock C.J. |
Keywords: | investment, programming: quadratic |
Quantitative fund management invariably involves portfolio performance being measured in terms of a quadratic objective function (due to the inclusion of variance terms as a measure of risk). Periodically, the constituents of the fund are adjusted to improve performance. This adjustment incurs a transaction cost which is a modulus function of the changes in holdings. Thus the fund manager wishes to minimise a combined quadratic and modulus function. This paper presents a new approach to deal with the minimisation of this hybrid function, using a well tried quadratic programming algorithm. The new algorithm is demonstrated using a tactical asset allocation problem and an equity index tracking fund.