A hybrid approach combining iterated greedy heuristics and quadratic programming to track the 1/N portfolio

Strub, Oliver (3 July 2016). A hybrid approach combining iterated greedy heuristics and quadratic programming to track the 1/N portfolio (Unpublished). In: 28th European Conference on Operational Research. Poznan. 03.-06.07.2016.

Investors who apply the 1/N portfolio strategy invest an equal amount of their investment budget in all N stocks from a given investment universe. It was empirically shown that this simple strategy compares favorably in terms of risk and return to other, more sophisticated investment strategies like the mean-variance approach and extensions thereof. However, if N is large, the 1/N portfolio strategy causes substantial management costs. Therefore, we consider the problem of optimally tracking the returns of the 1/N portfolio by selecting a small subset of the N stocks and by determining each selected stock's weight in the tracking portfolio. This problem can be formulated as a mixed-integer quadratic program (MIQP) that uses the weights of the stocks in the 1/N portfolio, i.e., 1/N, as input. However, this MIQP becomes computationally expensive when N grows large. In this paper, we therefore develop a hybrid approach that combines an iterated greedy heuristic for selecting the subset of the N stocks and a quadratic program for determining the optimal weight of each selected stock. We demonstrate in a computational experiment that our hybrid approach outperforms a commercial MIQP solver in terms of solution quality and CPU time. Moreover, the portfolios we construct compare advantageously with well-known index-tracking approaches, which can be used to replicate the returns of any portfolio, in terms of tracking accuracy.

Item Type:

Conference or Workshop Item (Speech)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Business Management > Institute of Financial Management > Professorship for Quantitative Methods in Business Administration

UniBE Contributor:

Strub, Oliver

Subjects:

600 Technology > 650 Management & public relations

Language:

English

Submitter:

Larissa Notz

Date Deposited:

07 Jul 2017 15:50

Last Modified:

31 Jul 2017 08:19

URI:

https://boris.unibe.ch/id/eprint/98526

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