A MEAN-VARIANCE-SKEWNESS MODEL: ALGORITHM AND APPLICATIONS

Hiroshi Konno () and Rei Yamamoto ()
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Hiroshi Konno: Department of Industrial and Systems Engineering, Chuo University, 1-13-27 Kasuga, Bunkyo-Ku, Tokyo 112-8551, Japan
Rei Yamamoto: Department of Industrial and Systems Engineering, Chuo University, 1-13-27 Kasuga, Bunkyo-Ku, Tokyo 112-8551, Japan;

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 04, 409-423

Abstract: We will show that a mean-variance-skewness portfolio optimization model, a direct extension of the classical mean-variance model can be solved exactly and fast by using the state-of-the-art integer programming approach. This implies that we can now calculate a portfolio with maximal expected utility for any decreasing risk averse utility function.Also, we will show that this model can be used as a practical tool for constructing a portfolio when the asset returns follow skewed distribution. As an example, we apply this model to construct an index plus alpha portfolio.

Keywords: Portfolio optimization; third order moment; mean-variance-skewness; efficient frontier; nonconvex minimization; integer programming (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S0219024905003116

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