A global optimization problem in portfolio selection

A global optimization problem in portfolio selection

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Article ID: iaor200971045
Country: Germany
Volume: 6
Issue: 3
Start Page Number: 329
End Page Number: 345
Publication Date: Aug 2009
Journal: Computational Management Science
Authors: ,
Keywords: portfolio management
Abstract:

This paper deals with the issue of buy-in thresholds in portfolio optimization using the Markowitz approach. Optimal values of invested fractions calculated using, for instance, the classical minimum-risk problem can be unsatisfactory in practice because they lead to unrealistically small holdings of certain assets. Hence we may want to impose a discrete restriction on each invested fraction y i such as y i > y min or y i = 0. We shall describe an approach which uses a combination of local and global optimization to determine satisfactory solutions. The approach could also be applied to other discrete conditions–for instance when assets can only be purchased in units of a certain size (roundlots).

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