Portfolio optimization with simulated annealing algorithm

Document Type : Research Paper

Authors

1 Master of Financial Management, University of Tehran, Iran

2 Associate Prof., Financial Management, University of Tehran, Iran

3 Associate Prof., Industrial Engineering, University of Shahed, Iran

Abstract

The Markowitz issue of optimization can’t be solved by precise mathematical methods such as second order schematization, when real world condition and limitations are considered. On the other hand, most managers prefer to manage a small Portfolio of available assets in place of a huge Portfolio. It can be analogized to cardinal constrains, that is, constrains related to minimum and maximum current assets on Portfolios. This study aims to solve the problem of optimizing Portfolios with cardinality constrains, using simulated annealing algorithm. Therefore, by using the information of 50 companies which have been more active in Tehran’s exchange stock from April 2010 to April 2012, Portfolios’ efficient frontier has been supposed from 10 to 50. Results shows that first, simulated annealing algorithm has been successful in solving the above problem, and second, by selecting shares appropriately and determining suitable weights from it, smaller Portfolios with more suitable performances can be selected.

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References

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Financial Research Journal
Volume 17, Issue 1 - Serial Number 1
Spring & Summer
April 2015
Pages 141-158

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