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Optimal portfolios using linear programming models

Author

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  • C Papahristodoulou

    (Mälardalen University)

  • E Dotzauer

    (Mälardalen University)

Abstract

The classical quadratic programming (QP) formulation of the well-known portfolio selection problem has traditionally been regarded as cumbersome and time consuming. This paper formulates two additional models: (i) maximin, and (ii) minimization of mean absolute deviation. Data from 67 securities over 48 months are used to examine to what extent all three formulations provide similar portfolios. As expected, the maximin formulation yields the highest return and risk, while the QP formulation provides the lowest risk and return, which also creates the efficient frontier. The minimization of mean absolute deviation is close to the QP formulation. When the expected returns are confronted with the true ones at the end of a 6-month period, the maximin portfolios seem to be the most robust of all.

Suggested Citation

  • C Papahristodoulou & E Dotzauer, 2004. "Optimal portfolios using linear programming models," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(11), pages 1169-1177, November.
    • Handle: RePEc:pal:jorsoc:v:55:y:2004:i:11:d:10.1057_palgrave.jors.2601765
    DOI: 10.1057/palgrave.jors.2601765
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    Cited by:

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    2. Bartosz Kaszuba, 2012. "Empirical Comparison of Robust Portfolios’ Investment Effects," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(1), pages 047-061, June.
    3. Filippo Regina Mauro Gianfranco Bisceglia, 2020. "A-KA Model: an Optimization of the Stock’s Portofolio," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 23(2), pages 21-40, November.
    4. Guo, Sini & Yu, Lean & Li, Xiang & Kar, Samarjit, 2016. "Fuzzy multi-period portfolio selection with different investment horizons," European Journal of Operational Research, Elsevier, vol. 254(3), pages 1026-1035.
    5. Arezoo Mohammadi & Mehrzad Minnoei & Zadollah Fathi & Mohamamd Ali Keramati & Hossein Baktiari, 2022. "Optimal allocation of bank resources and risk reduction through portfolio decentralization," International Journal of Economic Sciences, European Research Center, vol. 11(2), pages 92-143, November.
    6. Jianjian Wang & Feng He & Xin Shi, 2019. "Numerical solution of a general interval quadratic programming model for portfolio selection," PLOS ONE, Public Library of Science, vol. 14(3), pages 1-16, March.
    7. Mohd Azdi Maasar & Diana Roman & Paresh Date, 2022. "Risk minimisation using options and risky assets," Operational Research, Springer, vol. 22(1), pages 485-506, March.
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    9. Li, Xiang & Qin, Zhongfeng, 2014. "Interval portfolio selection models within the framework of uncertainty theory," Economic Modelling, Elsevier, vol. 41(C), pages 338-344.
    10. Ghahtarani, Alireza & Najafi, Amir Abbas, 2013. "Robust goal programming for multi-objective portfolio selection problem," Economic Modelling, Elsevier, vol. 33(C), pages 588-592.

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