New concepts and algorithms for portfolio choice

Gunter Dueck and Peter Winker

Applied Stochastic Models and Data Analysis, 1992, vol. 8, issue 3, 159-178

Abstract: The paper studies the design of optimal (bond) portfolios taking into account various possible utility functions of an investor. The most prominent model for portfolio optimization was introduced by Markowitz. A real solution in this model can be achieved by quadratic programming routines for mean‐variance analysis. Of course, there are many reasons for an investor to prefer other utility criteria than return/variance of return in the Markowitz model. In the last few years, many efficient multiple purpose optimization heuristics have been invented for the needs in optimizing telephone nets, chip layouts, job shop scheduling etc. Some of these heuristics have essential advantages: they are extremely flexible and very easy to implement on computers. One example of such an algorithm is the threshold‐accepting algorithm (TA). TA is able to optimize portfolios under nearby arbitrary constraints and subject to nearly every utility function. In particular, the utility functions need neither to be convex, differentiable nor ‘smooth’ in any sense. We implemented TA for bond portfolio optimization with different utility criteria. The algorithms and computational results are presented. Under various utility functions, the ‘best’ portfolios look surprisingly different and have quite different qualities. Thus, for a portfolio manager it might be useful to provide himself with such a ‘multiple‐taste’ optimizer in order to be able easily to readjust it according to his own personal utility considerations.

Date: 1992
References: View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
https://doi.org/10.1002/asm.3150080306

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmda:v:8:y:1992:i:3:p:159-178

Access Statistics for this article

More articles in Applied Stochastic Models and Data Analysis from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().