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A Two-Stage Method for Considering Cardinality in Portfolio Optimization of Mutual Funds

Author

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  • Amir Alimi

Abstract

Mutual funds are important financial institutes. There are several methods for performance evaluation of mutual funds such as portfolio optimization. Portfolio optimization has a basic model that has completed up to now. One of completions is adding cardinality constraint to the model. Considering cardinality in portfolio optimization model makes it an integer programming problem that solving it, is hard and makes the efficient frontier discontinuous. In current study in first stage we rank the mutual funds with VIKOR method and based on 5 characteristics- rate of return, variance, semivariance, Treynor ratio and Sharpe ratio. In second stage according to cardinality level best ranked mutual funds are chosen. A mean-semivariance portfolio optimization model is written using chosen funds. This model is solved using fuzzy technique programming and efficient frontier is obtained. Real data from NASDAQ based on 92 mutual funds are used to illustrate the effectiveness of proposed methodology. Results show that the efficient frontier obtained from our methodology is continuous and near to unconstrained efficient frontier.

Suggested Citation

  • Amir Alimi, 2015. "A Two-Stage Method for Considering Cardinality in Portfolio Optimization of Mutual Funds," Modern Applied Science, Canadian Center of Science and Education, vol. 9(8), pages 289-289, August.
    • Handle: RePEc:ibn:masjnl:v:9:y:2015:i:8:p:289
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    References listed on IDEAS

    as
    1. 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.
    2. Murthi, B. P. S. & Choi, Yoon K. & Desai, Preyas, 1997. "Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach," European Journal of Operational Research, Elsevier, vol. 98(2), pages 408-418, April.
    3. Opricovic, Serafim & Tzeng, Gwo-Hshiung, 2004. "Compromise solution by MCDM methods: A comparative analysis of VIKOR and TOPSIS," European Journal of Operational Research, Elsevier, vol. 156(2), pages 445-455, July.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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