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The Optimal Mean-Variance Portfolio Formulation by Mathematical Planning  

Kim, Tai-Young (Department of Business Management, Dongyang Technical College)
Publication Information
Journal of Korean Society of Industrial and Systems Engineering / v.32, no.4, 2009 , pp. 63-71 More about this Journal
Abstract
The traditional portfolio optimization problem is to find an investment plan for securities with reasonable trade-off between the rate of return and the risk. The seminal work in this field is the mean-variance model by Markowitz, which is a quadratic programming problem. Since it is now computationally practical to solve the model, a number of alternative models to overcome this complexity have been proposed. In this paper, among the alternatives, we focus on the Mean Absolute Deviation (MAD) model. More specifically, we developed an algorithm to obtain an optimal portfolio from the MAD model. We showed mathematically that the algorithm can solve the problem to optimality. We tested it using the real data from the Korean Stock Market. The results coincide with our expectation that the method can solve a variety of problems in a reasonable computational time.
Keywords
Portfolio Investment; Financial Engineering; Integer Programming; MAD;
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