Particle swarm optimization approach to portfolio construction |
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| Authors: | Ren-Raw Chen Wiliam Kaihua Huang Shih-Kuo Yeh |
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| Affiliation: | 1. Graduate School of Business Administration, Fordham University, New York, NY, USA;2. Union Bank of Switzerland, Shanghai, China;3. Department of Finance, National Chung Hsing University, Taichung, Taiwan |
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| Abstract: | Particle swarm optimization (PSO) is an artificial intelligence technique that can be used to find approximate solutions to extremely difficult or impossible numeric optimization problems. Recently, PSO algorithms have been widely used in solving complex financial optimization problems. This paper presents a PSO approach to solve a portfolio construction problem, since this methodology is a population-based heuristic algorithm that is suitable for solving high-dimensional constrained optimization problems. The computational results show that PSO algorithms have advantages in optimizing the Sortino ratio, especially in speed, when the size of the portfolio is large. |
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| Keywords: | particle swarm optimization portfolio construction Sortino ratio |
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