Vol 6 No 2 (2011)
Articles

Mean–Absolute Deviation Portfolio Models with Discrete Choice Constraints

Roy H. Kwon
University of Toronto
Bio
Stephen J. Stoyan
University of Southern California
Bio
Published January 3, 2012
Keywords
  • portfolio optimization,
  • mixed-integer programming,
  • heuristics
How to Cite
Kwon, R. H., & Stoyan, S. J. (2012). Mean–Absolute Deviation Portfolio Models with Discrete Choice Constraints. Algorithmic Operations Research, 6(2), Pages 118 - 134. Retrieved from https://journals.lib.unb.ca/index.php/AOR/article/view/15997

Abstract

In this paper, we consider the problem of incorporating a wide set of real-world trading constraints to the mean-variance portfolio framework. Instead of using the mean-variance model directly, we use the equivalent Mean-Absolute Deviation (MAD) linear programming formulation. The addition of the trading constraints transforms the MAD model to a mixed-integer linear programming problem. We solve both the mean-variance and MAD models with the various trading constraints using a commercial solver and find that MAD model is substantially more tractable. In addition, a heuristic is developed for the extended MAD model to provide solutions for larger problem instances.