The Linear Fractional Portfolio Selection Problem

Bruce H. Faaland and Nancy L. Jacob
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Bruce H. Faaland: University of Washington
Nancy L. Jacob: University of Washington

Management Science, 1981, vol. 27, issue 12, 1383-1389

Abstract: A simplified portfolio selection criterion suggested by Sharpe and Mao involves choosing at most n securities from a universe of m securities in order to maximize the portfolio's excess-return-to-beta ratio. This paper examines alternative solution procedures to achieve this objective, including a gradient procedure whose continuous Knapsack subproblems in m bounded variables are solved in O(m) time. The effect on the optimal portfolio of increasing n is discussed, as well as the relationship between the excess-return-to-beta ratio of an individual security and that of the optimal portfolio. The paper concludes with computational experience on problems with n ranging from 10 to 200 and m from 500 to 1,245.

Keywords: finance: portfolio; programming: fractional (search for similar items in EconPapers)
Date: 1981
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:27:y:1981:i:12:p:1383-1389

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