An Iterated Greedy Heuristic for the 1/N Portfolio Tracking Problem

Oliver Strub, Norbert Trautmann

Abstract

The 1/N portfolio represents a simple strategy to invest money in the stock market. Investors who follow this strategy invest an equal proportion of their investment budget in each stock from a given investment universe. Empirical results indicate that this strategy leads to competitive results in terms of risk and return compared to more sophisticated strategies. However, in practice, investing in all N stocks from a given investment universe can cause substantial transaction costs if N is large or if the market is illiquid. The optimization problem considered in this paper consists of optimally replicating the returns of the 1/N portfolio by selecting a small subset of the N stocks, and determining the respective weight for each selected stock. For the first time, we apply the concept of iterated greedy heuristics to this novel portfolio-optimization problem. For analyzing the performance of our heuristic approach, we also formulate the problem as a mixed-integer quadratic program (MIQP). Our computational results indicate that, within a limited CPU time, our heuristic approach outperforms the MIQP, in particular when the number of stocks N grows large.

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Paper Citation


in Harvard Style

Strub O. and Trautmann N. (2016). An Iterated Greedy Heuristic for the 1/N Portfolio Tracking Problem . In Proceedings of 5th the International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES, ISBN 978-989-758-171-7, pages 424-431. DOI: 10.5220/0005827704240431


in Bibtex Style

@conference{icores16,
author={Oliver Strub and Norbert Trautmann},
title={An Iterated Greedy Heuristic for the 1/N Portfolio Tracking Problem},
booktitle={Proceedings of 5th the International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,},
year={2016},
pages={424-431},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0005827704240431},
isbn={978-989-758-171-7},
}


in EndNote Style

TY - CONF
JO - Proceedings of 5th the International Conference on Operations Research and Enterprise Systems - Volume 1: ICORES,
TI - An Iterated Greedy Heuristic for the 1/N Portfolio Tracking Problem
SN - 978-989-758-171-7
AU - Strub O.
AU - Trautmann N.
PY - 2016
SP - 424
EP - 431
DO - 10.5220/0005827704240431