IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0505006.html
   My bibliography  Save this paper

Optimal portfolios using linear programming models

Author

Listed:
  • Christos Papahristodoulou

    (Mälardalen University, School of Business)

  • Erik Dotzauer

    (Mälardalen University, Department of Mathematics)

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 six months period, the maximin portfolios seem to be the most robust of all.

Suggested Citation

  • Christos Papahristodoulou & Erik Dotzauer, 2005. "Optimal portfolios using linear programming models," Finance 0505006, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0505006
    Note: Type of Document - pdf. Published in Journal of the Operational research Society (2004) 55, 1169-1177
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0505/0505006.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Leon, T. & Liern, V. & Vercher, E., 2002. "Viability of infeasible portfolio selection problems: A fuzzy approach," European Journal of Operational Research, Elsevier, vol. 139(1), pages 178-189, May.
    2. Mansini, Renata & Speranza, Maria Grazia, 1999. "Heuristic algorithms for the portfolio selection problem with minimum transaction lots," European Journal of Operational Research, Elsevier, vol. 114(2), pages 219-233, April.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    5. Martin R. Young, 1998. "A Minimax Portfolio Selection Rule with Linear Programming Solution," Management Science, INFORMS, vol. 44(5), pages 673-683, May.
    6. Rudolf, Markus & Wolter, Hans-Jurgen & Zimmermann, Heinz, 1999. "A linear model for tracking error minimization," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 85-103, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Li, Xiang & Qin, Zhongfeng, 2014. "Interval portfolio selection models within the framework of uncertainty theory," Economic Modelling, Elsevier, vol. 41(C), pages 338-344.
    3. Ghahtarani, Alireza & Najafi, Amir Abbas, 2013. "Robust goal programming for multi-objective portfolio selection problem," Economic Modelling, Elsevier, vol. 33(C), pages 588-592.

    More about this item

    Keywords

    Finance; linear programming; investment analysis; risk analysis;

    JEL classification:

    • G - Financial Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0505006. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.