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A compact mean-variance-skewness model for large-scale portfolio optimization and its application to the NYSE market

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  • H S Ryoo

    (Korea University)

Abstract

This paper develops a portfolio optimization model that uses the first three moments of the distribution of the rate of return on investment in selecting portfolios. An alternative measure of skewness is designed for the purpose, and, in the grand scheme of compact factorization, the proposed model is transformed to an equivalent quadratic program with a quadratic constraint with 2 T nonlinear variables and terms, where usually T⩽50. Extensive computational results are obtained on a real-world dataset of the returns of about 3500 stocks that were traded in the NYSE from 3 January to 17 September 2002. In summary, the portfolios built by the proposed model gave the average return on investment of 66.85% over the course of 150 trading days, a period in time when US economy and stock markets suffered tremendously after the tragic events of September 2001.

Suggested Citation

  • H S Ryoo, 2007. "A compact mean-variance-skewness model for large-scale portfolio optimization and its application to the NYSE market," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(4), pages 505-515, April.
    • Handle: RePEc:pal:jorsoc:v:58:y:2007:i:4:d:10.1057_palgrave.jors.2602168
    DOI: 10.1057/palgrave.jors.2602168
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    References listed on IDEAS

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    Cited by:

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    2. Kerstens, Kristiaan & Mounir, Amine & Van de Woestyne, Ignace, 2011. "Geometric representation of the mean-variance-skewness portfolio frontier based upon the shortage function," European Journal of Operational Research, Elsevier, vol. 210(1), pages 81-94, April.
    3. Filippo Regina Mauro Gianfranco Bisceglia, 2020. "A-KA Model: an Optimization of the Stock’s Portofolio," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 23(2), pages 21-40, November.
    4. Younes Berouaga & Cherif El Msiyah & Jaouad Madkour, 2023. "Portfolio Optimization Using Minimum Spanning Tree Model in the Moroccan Stock Exchange Market," IJFS, MDPI, vol. 11(2), pages 1-20, March.
    5. J. Baixauli-Soler & Eva Alfaro-Cid & Matilde Fernandez-Blanco, 2011. "Mean-VaR Portfolio Selection Under Real Constraints," Computational Economics, Springer;Society for Computational Economics, vol. 37(2), pages 113-131, February.
    6. Emmanuel Jurczenko & Bertrand Maillet & Paul Merlin, 2008. "Efficient Frontier for Robust Higher-order Moment Portfolio Selection," Post-Print halshs-00336475, HAL.
    7. Li, Xiang & Qin, Zhongfeng, 2014. "Interval portfolio selection models within the framework of uncertainty theory," Economic Modelling, Elsevier, vol. 41(C), pages 338-344.
    8. Paweł Wnuk Lipinski, 2013. "Portfolio selection models based on characteristics of return distributions," Working Papers 2013-14, Faculty of Economic Sciences, University of Warsaw.

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