No arbitrage and a linear portfolio selection model

Renato Bruni (), Francesco Cesarone (), Andrea Scozzari () and Fabio Tardella ()
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Francesco Cesarone: Università degli Studi Roma Tre, Dip. di Studi Aziendali
Andrea Scozzari: Università degli Studi “Niccolò Cusano” - Telematica, Roma, Facoltà di Economia
Fabio Tardella: Università di Roma “Sapienza”, Dip. Metodi e Modelli per l''Economia, il Territorio e la Finanza

Economics Bulletin, 2013, vol. 33, issue 2, 1247-1258

Abstract: We propose a linear bi-objective optimization approach to the problem of finding a portfolio that maximizes average excess return with respect to a benchmark index while minimizing underperformance over a learning period. We establish some theoretical results linking classical No Arbitrage conditions to the existence of a feasible portfolio for our model that strictly outperforms the index. Empirical analyses on publicly available real-world financial datasets show the effectiveness of the model and confirm the described theoretical results.

Keywords: Enhanced Index Tracking; Asset Management; Portfolio Selection; No Arbitrage; Linear Programming (search for similar items in EconPapers)
JEL-codes: C6 G1 (search for similar items in EconPapers)
Date: 2013-05-21
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Citations: View citations in EconPapers (7)

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