Portfolio construction as linearly constrained separable optimization

DOI10.1007/S11081-022-09748-XMaRDI QIDQ6050367zbMATH OpenOpenAlexFDO

Authors Nicholas Moehle, Jack Gindi, Stephen Boyd, Mykel J. Kochenderfer

Publication date 18 September 2023

Published in Optimization and Engineering (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2103.05455

zbMATH Keywords

convex optimizationportfolio optimizationproximal methodsconvex envelope

Mathematics Subject Classification ID

Convex programming (90C25) Portfolio theory (91G10)

Abstract: Mean-variance portfolio optimization problems often involve separable nonconvex terms, including penalties on capital gains, integer share constraints, and minimum position and trade sizes. We propose a heuristic algorithm for such problems based on the alternating direction method of multipliers (ADMM). This method allows for solve times in tens to hundreds of milliseconds with around 1000 securities and 100 risk factors. We also obtain a bound on the achievable performance. Our heuristic and bound are both derived from similar results for other optimization problems with a separable objective and affine equality constraints. We discuss a concrete implementation in the case where the separable terms in the objective are piecewise quadratic, and we empirically demonstrate its effectiveness for tax-aware portfolio construction.

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Cites work

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Cited in

(4)

• scientific article; zbMATH DE number 2065346 (Why is no real title available?)
• Linear and mixed integer programming for portfolio optimization
• Individual and cooperative portfolio optimization as linear program
• Mean-variance efficient large portfolios: a simple machine learning heuristic technique based on the two-fund separation theorem

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