An application of Microsoft Excel's evolutionary solver based on a novel chromosome encoding scheme to the 1/N portfolio tracking problem

Strub, Oliver; Trautmann, Norbert (2016). An application of Microsoft Excel's evolutionary solver based on a novel chromosome encoding scheme to the 1/N portfolio tracking problem. In: 2016 IEEE International Conference on Industrial Engineering and Engineering Management (IEEM) (pp. 745-749). IEEE 10.1109/IEEM.2016.7797975

Text 07798085 (2).pdf - Published Version Restricted to registered users only Available under License Publisher holds Copyright. Download (739kB)

The 1/N portfolio is an equally-weighted portfolio composed of all N stocks from a given investment universe. This portfolio offers an attractive risk-return profile but causes substantial management costs if N is large. Therefore, we consider the problem of optimally tracking the 1/N portfolio by constructing an equally-weighted portfolio composed of a subset of the N stocks. This problem can be formulated as a binary quadratic program that, however, becomes computationally expensive to solve for mathematical programming solvers if N is large. In this paper, we present a novel chromosome encoding scheme based on a string of unique integers representing the indices of the selected stocks. We implement this scheme on a spreadsheet and apply Microsoft Excel's evolutionary solver to devise tracking portfolios. We demonstrate that, by using our novel encoding scheme instead of an existing one, the solver determines considerably better solutions.

Interest & Impact

Downloads

5 since deposited on 07 Jul 2017
0 in the past 12 months

Citations

5 Citations in Web of Science ®
6 Citations in Scopus

Search

in Google Scholar™

Services

Actions (login required)

Edit item

Actions (login required)

Edit item