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A Simple Algorithm for Optimal Portfolio Selection with Fixed Transaction Costs

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Author Info

  • Nitin R. Patel

    (Indian Institute of Management, Ahmedabad)

  • Marti G. Subrahmanyam

    (New York University)

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    Abstract

    The general optimal portfolio selection problem with fixed transaction costs is a complex mathematical programming problem. However, by placing reasonable restrictions on the variance-covariance matrix of returns, it is possible to simplify the solution of the problem. Specifically if the structure of returns between securities is such that the pairwise correlation coefficients are approximately the same, a fairly simple algorithm which requires little computational effort can be employed. This method can also be extended to the case where changes in the information set necessitate a revision of an existing portfolio.

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    File URL: http://dx.doi.org/10.1287/mnsc.28.3.303
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 28 (1982)
    Issue (Month): 3 (March)
    Pages: 303-314

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    Handle: RePEc:inm:ormnsc:v:28:y:1982:i:3:p:303-314

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    Related research

    Keywords: finance; finance-investments; portfolio selection;

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    Cited by:
    1. Zhang, Wei-Guo & Xiao, Wei-Lin & Xu, Wei-Jun, 2010. "A possibilistic portfolio adjusting model with new added assets," Economic Modelling, Elsevier, vol. 27(1), pages 208-213, January.
    2. Kapteyn, Arie & Teppa, Federica, 2011. "Subjective measures of risk aversion, fixed costs, and portfolio choice," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 564-580, August.
    3. Dimitris Bertsimas & Romy Shioda, 2009. "Algorithm for cardinality-constrained quadratic optimization," Computational Optimization and Applications, Springer, vol. 43(1), pages 1-22, May.
    4. Xi-li Zhang & Wei-Guo Zhang & Wei-jun Xu & Wei-Lin Xiao, 2010. "Possibilistic Approaches to Portfolio Selection Problem with General Transaction Costs and a CLPSO Algorithm," Computational Economics, Society for Computational Economics, vol. 36(3), pages 191-200, October.
    5. Sankaran, Jayaram K. & Patil, Ajay A., 1999. "On the optimal selection of portfolios under limited diversification," Journal of Banking & Finance, Elsevier, vol. 23(11), pages 1655-1666, November.
    6. Mansini, Renata & Ogryczak, Wlodzimierz & Speranza, M. Grazia, 2014. "Twenty years of linear programming based portfolio optimization," European Journal of Operational Research, Elsevier, vol. 234(2), pages 518-535.
    7. Woodside-Oriakhi, M. & Lucas, C. & Beasley, J.E., 2013. "Portfolio rebalancing with an investment horizon and transaction costs," Omega, Elsevier, vol. 41(2), pages 406-420.
    8. Gianfranco Guastaroba & Renata Mansini & M. Speranza, 2009. "Models and Simulations for Portfolio Rebalancing," Computational Economics, Society for Computational Economics, vol. 33(3), pages 237-262, April.

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