A novel evolutionary optimization algorithm based solution approach for portfolio selection problem

Mohammad Shahid, Mohd Shamim, Zubair Ashraf, Mohd Shamim Ansari

Abstract


The portfolio selection problem is one of the most common problems which drawn the attention of experts of the field in recent decades. The mean variance portfolio optimization aims to minimize variance (risk) and maximize the expected return. In case of linear constraints, the problem can be solved by variants of Markowitz. But many constraints such as cardinality, and transaction cost, make the problem so vital that conventional techniques are not good enough in giving efficient solutions. Stochastic fractal search (SFS) is a strong population based meta-heuristic approach that has derived from evolutionary computation (EC). In this paper, a novel portfolio selection model using SFS based optimization approach has been proposed to maximize Sharpe ratio. SFS is an evolutionary approach. This algorithm models the natural growth process using fractal theory. Performance evaluation has been conducted to determine the effectiveness of the model by making comparison with other state of art models such as genetic algorithm (GA) and simulated annealing (SA) on same objective and environment. The real datasets of the Bombay stock exchange (BSE) Sensex of Indian stock exchange have been taken in the study. Study reveals the superior performance of the SFS than GA and SA.

Keywords


evolutionary algorithm; portfolio optimization; portfolio selection; sharpe ratio; stochastic fractal search;

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DOI: http://doi.org/10.11591/ijai.v11.i3.pp843-850

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