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Robust Portfolio Optimization under Computational Complexity: A P-vs-NP-Inspired Markowitz-CAPM Framework with Cardinality Constraints and a Black-Scholes Derivative-Pricing Overlay

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  • Gondauri, Davit

Abstract

his study develops a robust computational-finance framework for cardinality-constrained portfolio optimization by integrating Markowitz mean-variance logic, CAPM expected-return calibration, a P-vs-NP-inspired support-selection layer, stochastic and metaheuristic search, exact reduced benchmarking, robustness diagnostics, and a Black-Scholes derivative-pricing overlay. The empirical universe is a fixed Damodaran January 2026 U.S. industry dataset containing 94 industry portfolios after excluding aggregate market rows. Expected returns are constructed as CAPM-implied priors using a risk-free rate of 3.97% and an equity risk premium of 4.23%, while portfolio risk is evaluated through single-index covariance geometry, correlation diagnostics, and eigenvalue concentration tests. The baseline K = 10 sparse-selection problem contains C(94,10) = 9,041,256,841,903 possible supports before continuous weights are optimized, motivating a layered comparison of greedy search, Monte Carlo sampling, genetic algorithms, and GA-plus-continuous reoptimization. Exact evidence is supplied through a reduced n = 20, K = 6 benchmark in which all 38,760 supports are enumerated. The study reports best-found full-universe incumbents under documented search coverage rather than claiming certified global optimality. Robustness layers examine covariance alternatives, Rf/ERP perturbations, weight caps, transaction costs, beta drift, risk contributions, stress scenarios, and falsification gates. The Black-Scholes overlay demonstrates how option value, delta exposure, leverage-adjusted beta, and volatility can be incorporated without treating derivative leverage as free performance. The contribution is methodological and empirical: it shows how computational complexity, asset-pricing priors, covariance dependence, algorithmic search, and derivative realism can be combined in a transparent, reproducible, and claim-bounded portfolio-optimization architecture. The study does not prove P ≠ NP, does not certify full n = 94 global optimality, and does not establish realized historical investment dominance.

Suggested Citation

  • Gondauri, Davit, 2026. "Robust Portfolio Optimization under Computational Complexity: A P-vs-NP-Inspired Markowitz-CAPM Framework with Cardinality Constraints and a Black-Scholes Derivative-Pricing Overlay," EconStor Preprints 341673, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:341673
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    References listed on IDEAS

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    1. Ledoit, Olivier & Wolf, Michael, 2004. "A well-conditioned estimator for large-dimensional covariance matrices," Journal of Multivariate Analysis, Elsevier, vol. 88(2), pages 365-411, February.
    2. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 7, pages 207-227, World Scientific Publishing Co. Pte. Ltd..
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    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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