A Global Optimization Heuristic for Portfolio Choice with VaR and Expected Shortfall
Constraints on downside risk, measured by shortfall probability, expected shortfall etc., lead to optimal asset allocations which differ from the mean-variance optimum. The resulting optimization problem can become quite complex as it exhibits multiple local extrema and discontinuities, in particular if constraints restricting the trading variables to integers, constraints on the holding size of assets or on the maximum number of different assets in the portfolio are introduced. In such situations classical optimization methods fail to work efficiently and heuristic optimization techniques can be the only way out. This contribution shows how a particular optimization heuristic, called threshold accepting, can be successfully used to solve complex portfolio choice problems.
Keywords:Portfolio Optimization Downside-Risk Measures Heuristic Optimization Threshold Accepting
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