Stochastic Dominance and Portfolio Performance Under Heuristic Optimization

Adeola Oyenubi

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2021, pp 377-382 from Springer

Abstract: Abstract This paper considers the problem of evaluating portfolio performance when portfolios are constructed with a heuristic method. Since heuristic methods are stochastic in nature they are only guaranteed to lead to a near-optimal solution. In other words, the solution can vary with the parameters of the optimization algorithm. Specifically, within a certain tolerance, the solution can vary with the starting value(s) of the optimization. We propose a method to deal with this complication when comparing portfolio strategies. The method involves running the heuristic method multiple times and comparing the distribution of the evaluation functions. We show that this yields reasonable results.

Keywords: Portfolio optimisation; Stochastic dominance; Portfolio performance; Heuristic methods (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-78965-7_55

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DOI: 10.1007/978-3-030-78965-7_55

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