Optimal portfolios using linear programming models

Christos Papahristodoulou and Erik Dotzauer
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Erik Dotzauer: Mälardalen University, Department of Mathematics

Finance from University Library of Munich, Germany

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.

Keywords: Finance; linear programming; investment analysis; risk analysis (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Date: 2005-05-04
New Economics Papers: this item is included in nep-rmg
Note: Type of Document - pdf. Published in Journal of the Operational research Society (2004) 55, 1169-1177
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Citations: View citations in EconPapers (4)

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Journal Article: Optimal portfolios using linear programming models (2004)
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