Application of Two-Stage Stochastic Linear Program for Portfolio Selection Problem
We consider a portfolio selection problem under the consideration of dynamic closing time of the portfolio. The selection strategy is to take the long position on the stocks and the short position on an index future. We will close our portfolio whenever our profit exceeds the predetermined target during the investment period, otherwise, we will own the portfolio till the maturity date of the future. Our purpose is to have a profitable portfolio with steady return which is higher than the interest rate of savings and independent of the market. To deal with the stocks selection problem and, at the same time, the uncertainty on the closing time due to the fluctuation of the market, we define the corresponding optimization problem as a two-stage stochastic linear program (two-stage SLP). Our models are tested by the real-world data and the results are consistent with what we expected.
KeywordsPortfolio selection Futures Two-stage stochastic linear program
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