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A reactive greedy randomized adaptive search procedure for a mixed integer portfolio optimization problem

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  • K.P. Anagnostopoulos
  • P.D. Chatzoglou
  • S. Katsavounis
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    Abstract

    Purpose – The purpose of this paper is to present a procedure for finding the efficient frontier, i.e. a non-decreasing curve representing the set of Pareto-optimal or non-dominated portfolios, when the standard Markowitz' classical mean-variance model is enriched with additional constraints. Design/methodology/approach – The mean-variance portfolio optimization model is extended to include integer constraints that limit a portfolio to have a specified number of assets, and to impose limits on the proportion of the portfolio held in a given asset. Optimization-based procedures run into difficulties in this framework and this motivates the investigation of heuristic algorithms to find acceptable solutions. Findings – The problem is solved by a greedy randomized adaptive search procedure (GRASP), enhanced by a learning mechanism and a bias function for determining the next element to be introduced in the solution. Originality/value – This is believed to be the first time, a GRASP for finding the efficient frontier for this class of portfolio selection problems is used.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=0307-4358&volume=36&issue=12&articleid=1891092&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 12 (December)
    Pages: 1057-1065

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:12:p:1057-1065

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    Related research

    Keywords: Modelling; Optimization techniques; Portfolio investment;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. N. J. Jobst & M. D. Horniman & C. A. Lucas & G. Mitra, 2001. "Computational aspects of alternative portfolio selection models in the presence of discrete asset choice constraints," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 489-501.
    2. Mansini, Renata & Speranza, Maria Grazia, 1999. "Heuristic algorithms for the portfolio selection problem with minimum transaction lots," European Journal of Operational Research, Elsevier, vol. 114(2), pages 219-233, April.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    4. Crama, Y. & Schyns, M., 2003. "Simulated annealing for complex portfolio selection problems," European Journal of Operational Research, Elsevier, vol. 150(3), pages 546-571, November.
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