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A Global Optimization Problem in Portfolio Selection

Michael Bartholomew-Biggs (matqmb***at***herts.ac.uk)
Stephen Kane (matqsjk***at***herts.ac.uk)

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 imply that very small amounts of certain assets are purchased. Realistically, we want to impose a disjoint restriction so that each invested fraction is either zero or exceeds a prescribed minimum threshold. 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 disjoint conditions - for instance in dealing with assets that can only be purchased in units of a certain size (roundlots).

Keywords: Global Optimization; Portfolio Selection

Category 1: Applications -- OR and Management Sciences (Finance and Economics )

Category 2: Global Optimization (Applications )

Citation: TR 335, Numerical Optimization Centre, University of Hertfordshire, Hatfield, UK

Download: [PDF]

Entry Submitted: 06/25/2004
Entry Accepted: 06/25/2004
Entry Last Modified: 06/25/2004

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