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Optimal portfolios using linear programming models

  • Theoretical Paper
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Journal of the Operational Research Society

Abstract

The classical quadratic programming (QP) formulation of the well-known portfolio selection problem has traditionally been regarded as cumbersome and time consuming. This paper formulates two additional models: (i) maximin, and (ii) minimization of mean absolute deviation. Data from 67 securities over 48 months are used to examine to what extent all three formulations provide similar portfolios. As expected, the maximin formulation yields the highest return and risk, while the QP formulation provides the lowest risk and return, which also creates the efficient frontier. The minimization of mean absolute deviation is close to the QP formulation. When the expected returns are confronted with the true ones at the end of a 6-month period, the maximin portfolios seem to be the most robust of all.

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Authors and Affiliations

  1. Mälardalen University, Västerås, Sweden

    C Papahristodoulou & E Dotzauer

Authors
  1. C Papahristodoulou
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  2. E Dotzauer
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Correspondence to C Papahristodoulou.

Appendix

Appendix

See Tables A1 , A2a and A2b.

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Papahristodoulou, C., Dotzauer, E. Optimal portfolios using linear programming models. J Oper Res Soc 55, 1169–1177 (2004). https://doi.org/10.1057/palgrave.jors.2601765

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  • DOI: https://doi.org/10.1057/palgrave.jors.2601765

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