Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market

Hiroshi Konno and Hiroaki Yamazaki
Additional contact information
Hiroshi Konno: Institute of Human and Social Sciences, Tokyo Institute of Technology, Tokyo, Japan
Hiroaki Yamazaki: Department of Social Engineering, Tokyo Institute of Technology, Tokyo, Japan

Management Science, 1991, vol. 37, issue 5, 519-531

Abstract: The purpose of this paper is to demonstrate that a portfolio optimization model using the L 1 risk (mean absolute deviation risk) function can remove most of the difficulties associated with the classical Markowitz's model while maintaining its advantages over equilibrium models. In particular, the L 1 risk model leads to a linear program instead of a quadratic program, so that a large-scale optimization problem consisting of more than 1,000 stocks may be solved on a real time basis. Numerical experiments using the historical data of NIKKEI 225 stocks show that the L 1 risk model generates a portfolio quite similar to that of the Markowitz's model within a fraction of time required to solve the latter.

Keywords: portfolio optimization; L1 risk function; linear programming; Markowitz's model; single-factor model (search for similar items in EconPapers)
Date: 1991
References: Add references at CitEc
Citations: View citations in EconPapers (302)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.37.5.519 (application/pdf)

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:inm:ormnsc:v:37:y:1991:i:5:p:519-531

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().