A Heuristic Approach to Portfolio Optimization

Manfred Gilli () and Evis Këllezi
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Evis Këllezi: Department of Econometrics and FAME, University of Geneva, Switzerland

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: Constraints on downside risk, measured by shortfall probability, expected shortfall, semi-variance etc., lead to optimal asset allocations which differ from the meanvariance optimum. The resulting optimization problem can become quite complex as it exhibits multiple local extrema and discontinuities, in particular if we also introduce constraints restricting the trading variables to integers, constraints on the holding size of assets or on the maximum number of different assets in the portfolio. In such situations classical optimization methods fail to work efficiently and heuristic optimization techniques can be the only way out. The paper shows how a particular optimization heuristic, called threshold accepting, can be successfully used to solve complex portfolio choice problems.

Keywords: Portfolio Optimization; Downside Risk Measures; Heuristic Optimization Threshold Accepting. (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 (search for similar items in EconPapers)
Date: 2000-10
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Citations: View citations in EconPapers (1)

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