On Genes, Insects, and Crystals: Determining Marginal Diversification Effects With Nature Based Algorithms
AbstractA popular argument states that most of the diversification in a portfolio can be obtained with a rather small number of securities. In this paper we present three algorithms to approach the underlying NP-hard problem of portfolio optimization with a cardinality constraint. All three of these algorithms are based on evolutionary processes found in nature: Genetic Algorithms, Ant Systems, and Simulated Annealing. We find that either of the algorithms is well suited to solve the problem. In addition, we show for the stocks in the FT-SE 100 that a small number of well selected stocks might well cause a better diversification than a large number of more or less arbitrarily picked stocks despite their respective weights in the portfolio being optimized.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 152.
Date of creation: 01 Apr 2001
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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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Portfolio Selection; Diversification; Cardinality; Stock Picking; Heuristic; Optimization; Genetic Algorithms; Ant Systems; Ant Colony Optimization; Simulated Annealing.;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
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