TY - JOUR
T1 - Stock portfolio selection with full-scale optimization and differential evolution
AU - Hagströmer, Björn
AU - Binner, Jane M.
PY - 2009
Y1 - 2009
N2 - Full-Scale Optimization (FSO) is a utility maximization approach to portfolio choice problems that has theoretical appeal but that suffers from computational burden in large scale problems. We apply the heuristic technique differential evolution to solve FSO-type asset selection problems of 97 assets under complex utility functions rendering rough utility search surfaces. We show that this problem is computationally feasible and that solutions retrieved with random starting values are converging to one optimum. Furthermore, the study constitutes the first FSO application to stock portfolio optimization. The results indicate that when investors are loss averse, FSO improves stock portfolio performance compared to Mean Variance (MV) portfolios. This finding widens the scope of applicability of FSO, but it is also stressed that out-of-sample success will always be dependent on the forecasting ability of the input return distributions.
AB - Full-Scale Optimization (FSO) is a utility maximization approach to portfolio choice problems that has theoretical appeal but that suffers from computational burden in large scale problems. We apply the heuristic technique differential evolution to solve FSO-type asset selection problems of 97 assets under complex utility functions rendering rough utility search surfaces. We show that this problem is computationally feasible and that solutions retrieved with random starting values are converging to one optimum. Furthermore, the study constitutes the first FSO application to stock portfolio optimization. The results indicate that when investors are loss averse, FSO improves stock portfolio performance compared to Mean Variance (MV) portfolios. This finding widens the scope of applicability of FSO, but it is also stressed that out-of-sample success will always be dependent on the forecasting ability of the input return distributions.
UR - http://www.tandfonline.com/10.1080/09603100903018778
UR - http://www.scopus.com/inward/record.url?scp=70349799282&partnerID=8YFLogxK
U2 - 10.1080/09603100903018778
DO - 10.1080/09603100903018778
M3 - Article
AN - SCOPUS:70349799282
SN - 0960-3107
VL - 19
SP - 1559
EP - 1571
JO - Applied Financial Economics
JF - Applied Financial Economics
IS - 19
ER -