Abstract
We consider the problem of selecting a portfolio of assets that provides theinvestor a suitable balance of expected return and risk. With respect to theseminal mean-variance model of Markowitz, we consider additionalconstraints on the cardinality of the portfolio and on the quantity ofindividual shares. Such constraints better capture the real-world tradingsystem, but make the problem more difficult to be solved with exact methods.We explore the use of local search techniques, mainly tabu search, for theportfolio selection problem. We compare the combine previous work on portfolioselection that makes use of the local search approach and we propose newalgorithms that combine different neighborhood relations. In addition, we showhow the use of randomization and of a simple form of adaptiveness simplifiesthe setting of a large number of critical parameters. Finally, we show how ourtechniques perform on public benchmarks.
Similar content being viewed by others
References
Bienstock, D. (1996). Computational study of a family of mixed-integer quadratic programming problems. Mathematical Programming, 74, 121–140.
Chang, T.-J., Meade, N., Beasley, J.E. and Sharaiha, Y.M. (2000). Heuristics for cardinality constrained portfolio optimisation. Computers and Operational Research, 27, 1271–1302.
Gendreau, M., Hertz, A. and Laporte, G. (1994). A tabu search heuristic for the vehicle routing problem. Management Science, 40(10), 1276–1290.
Glover, F. and Laguna, M. (1997). Tabu Search. Kluwer Academic Publishers.
Glover, F., Mulvey, J.M. and Hoyland, K. (1996). Solving dynamic stochastic control problems in finance using tabu search with variable scaling. In I.H. Osman and J.P. Kelly (eds.): Meta-Heuristics: Theory & Applications. Kluwer Academic Publishers, pp. 429–448.
Johnson, D.S., Aragon, C.R., McGeoch, L.A. and Schevon, C. (1989). Optimization by simulated annealing: An experimental evaluation; part I, graph partitioning. Operations Research, 37(6), 865–892.
Konno, H. and Suzuki, K.-I. (1995). A mean-variance-skewness portfolio optimization model. Journal of the Operations Research Society of Japan, 38(2), 173–187.
Konno, H. and Yamazaki, H. (1991). Mean-absolute deviation portfolio optimization model and its applications to Tokio stock market. Management Science, 37(5), 519–531.
Mansini, R. and Speranza, M.G. (1999). Heuristic algorithms for the portfolio selection problem with minimum transaction lots. European Journal of Operational Research 114, 219–233.
Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91.
Markowitz, H. Todd, P., Xu, G. and Yamane, Y. (1993). Computation of mean-semivariance efficient sets by the critical line algorithm. Annals of Operations Research, 45, 307–317.
Perold, A.F. (1984). Large scale portfolio optimization. Management Science, 30(10), 1143–1160.
Rolland, E. (1997). A tabu search method for constrained real-number search: Applications to portfolio selection. Technical Report, Dept. of accounting & management information systems. Ohio State University, Columbus.
Yoshimoto, A. (1996). The mean-variance approach to portfolio optimization subject to transaction costs. Journal of the Operations Research Society of Japan, 39(1), 99–117.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Schaerf, A. Local Search Techniques for Constrained Portfolio Selection Problems. Computational Economics 20, 177–190 (2002). https://doi.org/10.1023/A:1020920706534
Issue Date:
DOI: https://doi.org/10.1023/A:1020920706534