PORTFOLIO OPTIMIZATION OF SMALL SCALE FUND USING MEAN-ABSOLUTE DEVIATION MODEL

Hiroshi Konno ()
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Hiroshi Konno: Department of Industrial and Systems Engineering, Chuo University, 1-13-27 Kasuga, Bunkyo-ku, Tokyo 112, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2003, vol. 06, issue 04, 403-418

Abstract: The purpose of this paper is to show that we are now able to apply standard portfolio optimization methods to the management of small and medium scale fund, where transaction cost and minimal transaction unit constraints are not negligible.Unit transaction cost is usually larger when the amount of investment is smaller. Also, rounding of portfolio to the nearest integer multiple of minimal transaction unit will have non negligible effect on the risk-return structure of the portfolio.We will show that the use of mean-absolute deviation model enables one to handle concave transaction cost and minimal transaction unit constraints in an efficient manner using branch and bound algorithm. Also, we will show that the minimal transaction cost rebalancing problem can be solved by using the same algorithm.

Keywords: Small fund; mean-absolute deviation model; concave transaction cost; minimal transaction unit constraint; branch and bound algorithm (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024903001979

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