Linear programing models for portfolio optimization using a benchmark

Seyoung Park, Hyunson Song and Sungchul Lee

The European Journal of Finance, 2019, vol. 25, issue 5, 435-457

Abstract: We consider the problem of constructing a perturbed portfolio by utilizing a benchmark portfolio. We propose two computationally efficient portfolio optimization models, the mean-absolute deviation risk and the Dantzig-type, which can be solved using linear programing. These portfolio models push the existing benchmark toward the efficient frontier through sparse and stable asset selection. We implement these models on two benchmarks, a market index and the equally-weighted portfolio. We carry out an extensive out-of-sample analysis with 11 empirical datasets and simulated data. The proposed portfolios outperform the benchmark portfolio in various performance measures, including the mean return and Sharpe ratio.

Date: 2019
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DOI: 10.1080/1351847X.2018.1536070

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