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: | Gaivoronski Alexei A., Wijst Nico van der, Krylov Sergiy |
Keywords: | risk, optimization |
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.