Optimal portfolio selection and dynamic benchmark tracking

Optimal portfolio selection and dynamic benchmark tracking

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Article ID: iaor2006180
Country: Netherlands
Volume: 163
Issue: 1
Start Page Number: 115
End Page Number: 131
Publication Date: May 2005
Journal: European Journal of Operational Research
Authors: , ,
Keywords: risk, optimization
Abstract:

This paper analyzes different approaches to portfolio selection when the requirement to portfolio performance is formulated relative to a given benchmark. For example, it may be desirable to track a market index as closely as possible. We develop several portfolio selection algorithms based on different perceptions of risk and different risk/target measures, ranging from the traditional variance to the more modern value-at-risk. In a dynamic setting we address the issue of optimal portfolio rebalancing. We develop an algorithm for determining whether or not to rebalance a given portfolio, based on transaction costs and new information about market conditions. Our approaches are tested on a set of stock data from the Oslo stock exchange.

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