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The Memetic Tree-based Genetic Algorithm and its application to Portfolio Optimization

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Abstract

We introduce a Memetic system to solve the application problem of Financial Portfolio Optimization. This problem consists of selecting a number of assets from a market and their relative weights to form an investment strategy. These weights must be optimized against a utility function that considers the expected return of each asset, and their co-variance; which means that as the number of available assets increases, the search space increases exponentially. Our method introduces two new concepts that set it apart from previous evolutionary based approaches. The first is the Tree-based Genetic Algorithm (GA), a recursive representation for individuals which allows the genome to learn information regarding relationships between the assets, and the evaluation of intermediate nodes. The second is the hybridization with local search, which allows the system to fine-tune the weights of assets after the tree structure has been decided. These two innovations make our system superior than other representations used for multi-weight assignment of portfolios.

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Authors and Affiliations

  1. Institute of Electrical Engineering, The University of Tokyo, Bunkyo-ku Hongo 7-3-1, Tokyo, Japan

    Claus Aranha & Hitoshi Iba

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  1. Claus Aranha
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  2. Hitoshi Iba
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Correspondence to Claus Aranha.

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Aranha, C., Iba, H. The Memetic Tree-based Genetic Algorithm and its application to Portfolio Optimization. Memetic Comp. 1, 139–151 (2009). https://doi.org/10.1007/s12293-009-0010-2

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  • DOI: https://doi.org/10.1007/s12293-009-0010-2

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