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The construction of an investment portfolio using stochastic programming

Author

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  • Audrius Kabašinskas
  • Lina Kadikinaitė

Abstract

The aim of this paper is to construct a portfolio of eight different stocks from New York Stock Exchange market (AIR, ABM, TSCO, HLX, KO, DIS, AMZN, and VZ) using stochastic programming. The next stage (period) prices are generated using a stochastic difference equation in order to introduce uncertainty. For the portfolio selection, we use three different risk measures – min–max decision rule, value-at-risk, and conditional value-at-risk. After constructing three different portfolios, they are compared using well-known efficiency ratios – Sharpe, Sortino, and Rachev ratios.

Suggested Citation

  • Audrius Kabašinskas & Lina Kadikinaitė, 2016. "The construction of an investment portfolio using stochastic programming," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 6(3), pages 151-160, July.
    • Handle: RePEc:taf:jsustf:v:6:y:2016:i:3:p:151-160
    DOI: 10.1080/20430795.2016.1188538
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    References listed on IDEAS

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    1. Cho, Young-Hyun & Linton, Oliver & Whang, Yoon-Jae, 2007. "Are there Monday effects in stock returns: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 736-755, December.
    2. Sortino, Frank A., 2009. "The Sortino Framework for Constructing Portfolios," Elsevier Monographs, Elsevier, edition 1, number 9780123749925.
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