The mathematics of portfolio optimization
This paper reviews the mathematics of portfolio optimization. The two main portfolio optimization models, Markowitz`s and the CAPM, are reviewed and their limitations noted. Research by the author concerning the reformulation of the portfolio problem in combinatorial terms is presented. This approach requires using integer binary variables as a generalization strategy to deal with the inherent complexity in the problem. The use of such variables, however, yields a number of benefits such as the incorporation of the binary nature of choice, taking into account the dual nature of investment variables, the incorporation of short sales restrictions at the security level and the ability to evaluate alternative economic scenarios.
- OSTI ID:
- 471983
- Report Number(s):
- CONF-960220--
- Country of Publication:
- United States
- Language:
- English
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