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Heuristic algorithms for the cardinality constrained efficient frontier

Author

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  • Woodside-Oriakhi, M.
  • Lucas, C.
  • Beasley, J.E.

Abstract

This paper examines the application of genetic algorithm, tabu search and simulated annealing metaheuristic approaches to finding the cardinality constrained efficient frontier that arises in financial portfolio optimisation. We consider the mean-variance model of Markowitz as extended to include the discrete restrictions of buy-in thresholds and cardinality constraints. Computational results are reported for publicly available data sets drawn from seven major market indices involving up to 1318 assets. Our results are compared with previous results given in the literature illustrating the effectiveness of the proposed metaheuristics in terms of solution quality and computation time.

Suggested Citation

  • Woodside-Oriakhi, M. & Lucas, C. & Beasley, J.E., 2011. "Heuristic algorithms for the cardinality constrained efficient frontier," European Journal of Operational Research, Elsevier, vol. 213(3), pages 538-550, September.
  • Handle: RePEc:eee:ejores:v:213:y:2011:i:3:p:538-550
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    References listed on IDEAS

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    Cited by:

    1. Babaei, Sadra & Sepehri, Mohammad Mehdi & Babaei, Edris, 2015. "Multi-objective portfolio optimization considering the dependence structure of asset returns," European Journal of Operational Research, Elsevier, vol. 244(2), pages 525-539.
    2. Guo, Yanhong & Zhou, Wenjun & Luo, Chunyu & Liu, Chuanren & Xiong, Hui, 2016. "Instance-based credit risk assessment for investment decisions in P2P lending," European Journal of Operational Research, Elsevier, vol. 249(2), pages 417-426.
    3. Foroudi, Pantea & Jin, Zhongqi & Gupta, Suraksha & Melewar, T.C. & Foroudi, Mohammad Mahdi, 2016. "Influence of innovation capability and customer experience on reputation and loyalty," Journal of Business Research, Elsevier, vol. 69(11), pages 4882-4889.
    4. Andriosopoulos, Kostas & Doumpos, Michael & Papapostolou, Nikos C. & Pouliasis, Panos K., 2013. "Portfolio optimization and index tracking for the shipping stock and freight markets using evolutionary algorithms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 16-34.
    5. Rui Pedro Brito & Hélder Sebastião & Pedro Godinho, 2015. "Portfolio Management With Higher Moments: The Cardinality Impact," GEMF Working Papers 2015-15, GEMF, Faculty of Economics, University of Coimbra.
    6. repec:eee:jomega:v:76:y:2018:i:c:p:28-37 is not listed on IDEAS
    7. repec:spr:annopr:v:267:y:2018:i:1:d:10.1007_s10479-016-2377-z is not listed on IDEAS
    8. repec:eee:jbrese:v:89:y:2018:i:c:p:287-304 is not listed on IDEAS
    9. Akiko Takeda & Mahesan Niranjan & Jun-ya Gotoh & Yoshinobu Kawahara, 2013. "Simultaneous pursuit of out-of-sample performance and sparsity in index tracking portfolios," Computational Management Science, Springer, vol. 10(1), pages 21-49, February.
    10. Gupta, Suraksha & Malhotra, Naresh K. & Czinkota, Michael & Foroudi, Pantea, 2016. "Marketing innovation: A consequence of competitiveness," Journal of Business Research, Elsevier, vol. 69(12), pages 5671-5681.
    11. Guastaroba, G. & Speranza, M.G., 2012. "Kernel Search: An application to the index tracking problem," European Journal of Operational Research, Elsevier, vol. 217(1), pages 54-68.
    12. Ralph Steuer & Markus Hirschberger & Kalyanmoy Deb, 2016. "Extracting from the relaxed for large-scale semi-continuous variable nondominated frontiers," Journal of Global Optimization, Springer, vol. 64(1), pages 33-48, January.
    13. Francesco Cesarone & Andrea Scozzari & Fabio Tardella, 2013. "A new method for mean-variance portfolio optimization with cardinality constraints," Annals of Operations Research, Springer, vol. 205(1), pages 213-234, May.
    14. Ralph E. Steuer & Markus Hirschberger & Kalyanmoy Deb, 2016. "Extracting from the relaxed for large-scale semi-continuous variable nondominated frontiers," Journal of Global Optimization, Springer, vol. 64(1), pages 33-48, January.
    15. Xiaojin Zheng & Xiaoling Sun & Duan Li & Jie Sun, 2014. "Successive convex approximations to cardinality-constrained convex programs: a piecewise-linear DC approach," Computational Optimization and Applications, Springer, vol. 59(1), pages 379-397, October.
    16. Cerqueti, Roy & Falbo, Paolo & Guastaroba, Gianfranco & Pelizzari, Cristian, 2013. "A Tabu Search heuristic procedure in Markov chain bootstrapping," European Journal of Operational Research, Elsevier, vol. 227(2), pages 367-384.
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    19. Yucheng Kao & Hsiu-Tzu Cheng, 2013. "Bacterial Foraging Optimization Approach to Portfolio Optimization," Computational Economics, Springer;Society for Computational Economics, vol. 42(4), pages 453-470, December.
    20. Yongxin Yang & Yu Zheng & Timothy M. Hospedales, 2018. "Diversity and Sparsity: A New Perspective on Index Tracking," Papers 1809.01989, arXiv.org.
    21. Gupta, Suraksha & Malhotra, Naresh K. & Czinkota, Michael & Foroudi, Pantea, 2016. "The local brand representative in reseller networks," Journal of Business Research, Elsevier, vol. 69(12), pages 5712-5723.
    22. Fulga, Cristinca, 2016. "Portfolio optimization with disutility-based risk measure," European Journal of Operational Research, Elsevier, vol. 251(2), pages 541-553.

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