Equally weighted cardinality constrained portfolio selection via factor models (Q2228417)

The portfolio selection problem deals with selecting a collection of financial assets and their proportions, according to the investor's risk preference, with the aim of obtaining the maximum expected return. The selection of assets allocated to the portfolio can be managed using different approaches: minimum risk allocation, equal weighting, risk parity, Sharpe ratio, and many others. The simplest model in portfolio optimization requires the equally weighted constraint, i.e, the weights of the assets are identical. Moreover, the previous papers devoted to this topic deal with the classical Markowitz model only; these papers do not integrate the cardinality constraint in factor models. On the contrary, the present paper focuses on the new model that combines the three features, namely; factor model, cardinality constraint and equally weighted constraint. This new model can obtain high quality solutions in very little computational time; moreover, it can be helpful to practitioners as a first step in order to evaluate what best assets to consider, and using this information in a later analysis where more elaborate techniques are used. Also, the paper presents some theoretical results on this new \(0-1\) pure binary quadratic optimization model.