Linear programing models for portfolio optimization using a benchmark

Seyoung Park, Hyunson Song, Sungchul Lee

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We consider the problem of constructing a perturbed portfolio by utilizing a benchmark portfolio. We propose two computationally efficient portfolio optimization models, the mean-absolute deviation risk and the Dantzig-type, which can be solved using linear programing. These portfolio models push the existing benchmark toward the efficient frontier through sparse and stable asset selection. We implement these models on two benchmarks, a market index and the equally-weighted portfolio. We carry out an extensive out-of-sample analysis with 11 empirical datasets and simulated data. The proposed portfolios outperform the benchmark portfolio in various performance measures, including the mean return and Sharpe ratio.

Original languageEnglish
Pages (from-to)435-457
Number of pages23
JournalEuropean Journal of Finance
Volume25
Issue number5
DOIs
Publication statusPublished - 2019 Mar 24

Fingerprint

Benchmark
Benchmark portfolio
Portfolio optimization
Optimization model
Market index
Sharpe ratio
Performance measures
Efficient frontier
Deviation
Efficient portfolio
Assets
Portfolio model

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance (miscellaneous)

Cite this

Park, Seyoung ; Song, Hyunson ; Lee, Sungchul. / Linear programing models for portfolio optimization using a benchmark. In: European Journal of Finance. 2019 ; Vol. 25, No. 5. pp. 435-457.
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Linear programing models for portfolio optimization using a benchmark. / Park, Seyoung; Song, Hyunson; Lee, Sungchul.

In: European Journal of Finance, Vol. 25, No. 5, 24.03.2019, p. 435-457.

Research output: Contribution to journalArticle

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