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A dynamic programming approach to solve efficient frontier

Author

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  • S. J. Sadjadi
  • M. B. Aryanezhad
  • B. F. Moghaddam

Abstract

This paper presents a closed form solution of the mean-variance portfolio selection problem for uncorrelated assets that precludes short sells. We also study the problem with the consideration of transaction cost. When the asset holding can be explicitly become available, one can have a better understanding of the behavior of efficient frontier. Our algorithm solves the mean-variance portfolio selection with uncorrelated risky assets plus one risk free asset. The algorithm is based on a continuous dynamic programming and provides a general closed form solution that is a function of expected returns and variances of all assets. The implementation of the algorithm is presented by some practical examples. Copyright Springer-Verlag 2004

Suggested Citation

  • S. J. Sadjadi & M. B. Aryanezhad & B. F. Moghaddam, 2004. "A dynamic programming approach to solve efficient frontier," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 60(2), pages 203-214, October.
    • Handle: RePEc:spr:mathme:v:60:y:2004:i:2:p:203-214
    DOI: 10.1007/s001860400367
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    Cited by:

    1. Yu, Jing-Rung & Lee, Wen-Yi, 2011. "Portfolio rebalancing model using multiple criteria," European Journal of Operational Research, Elsevier, vol. 209(2), pages 166-175, March.
    2. 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.

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