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Computational aspects of alternative portfolio selection models in the presence of discrete asset choice constraints

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  • N. J. Jobst
  • M. D. Horniman
  • C. A. Lucas
  • G. Mitra

Abstract

We consider the mean-variance (M-V) model of Markowitz and the construction of the risk-return efficient frontier. We examine the effects of applying buy-in thresholds, cardinality constraints and transaction roundlot restrictions to the portfolio selection problem. Such discrete constraints are of practical importance but make the efficient frontier discontinuous. The resulting quadratic mixed-integer (QMIP) problems are NP-hard and therefore computing the entire efficient frontier is computationally challenging. We propose alternative approaches for computing this frontier and provide insight into its discontinuous structure. Computational results are reported for a set of benchmark test problems.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:quantf:v:1:y:2001:i:5:p:489-501
    DOI: 10.1088/1469-7688/1/5/301
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