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A numerical evaluation of meta-heuristic techniques in portfolio optimisation

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Abstract

Optimal portfolio management under only mean and variance/covariance measures in Markowitz (J Finance 7(1):77–91, 1952; J Polit Econ:152–158, 1952) and Tobin (Rev Econ Stud 25:65–86, 1958; Econometrica 26(1):24–36, 1958) framework, is inefficient in real stock markets, as investors do not have quadratic utility functions, and returns are not normally, independently, and identically distributed. Hence alternative forms of utility functions with further higher moments such as the power utility should be used, but these do not provide closed form solutions towards a good feasible portfolio selection. A variety of innovative heuristics have been put forward recently. Hence implementing empirical data, we test and compare different heuristic techniques for portfolio management with power utility as well as contrasting the differences between power utility maximised portfolios and quadratic utility maximised portfolios.

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Authors and Affiliations

  1. School of Undergraduate Studies, Europe, UMUC, University of Maryland, 3501 University Boulevard East, Adelphi, MD, 20783, USA

    N. Loukeris

  2. CCFEA, University of Essex, Wivenhoe Park, Colchester, Essex, CO4 3SQ, UK

    N. Loukeris, D. Donelly, A. Khuman & Y. Peng

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  1. N. Loukeris
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  2. D. Donelly
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  3. A. Khuman
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  4. Y. Peng
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Correspondence to N. Loukeris.

Additional information

We are very thankful for Professor Dietmar Maringer’s, University of Basel, guidance and support throughout this study and greatly appreciate suggestions and intuitions put forward by Professor Sheri Markose, University of Essex.

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Loukeris, N., Donelly, D., Khuman, A. et al. A numerical evaluation of meta-heuristic techniques in portfolio optimisation. Oper Res Int J 9, 81–103 (2009). https://doi.org/10.1007/s12351-008-0028-0

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