Portfolio Selection Using Genetic Algorithm

Sefiane, Slimane and Benbouziane, Mohamed (2012): Portfolio Selection Using Genetic Algorithm. Published in: Journal of Applied Finance & Banking , Vol. 2, No. 4 (2012): pp. 143-154.

Abstract

The selection of optimal portfolios is the central problem of financial investment decisions. Mathematically speaking, portfolio selection refers to the formulation of an objective function that determines the weights of the portfolio invested in each asset as to maximize return and minimize risk. This paper applies the method of genetic algorithm (GA) to obtain an optimal portfolio selection. However, the GA parameters are of great importance in the procedure of convergence of this algorithm towards the optimal solution such as crossover. While, a five stock portfolio example is used in this paper to illustrate the applicability and efficiency of genetic algorithm method, GA method can also be used however for a larger number of portfolio compositions. The results obtained confirm previous research studies about the validity and efficiency of genetic algorithm in selecting optimal portfolios.

• Item Type: MPRA Paper
• Language: English
• Keywords: portfolio optimization, objective function, artificial intelligence methods, genetic algorithm
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

References

[1] C. Aranba and H. Iba, The Mimetic Tree-based Genetic Algorithm and its application to portfolio optimization, Springer Mimetic Comp., 1, (2009), 139-151.

[2] O.B. Augusto, S. Rabeau, Ph. Dépincé and F. Bennis, Multi-objective Genetic Algorithms: Away to Improve the Convergence Rate, Engineering Applications of Artificial Intelligence, 19(5), (2006), 501-510.

[3] R. Bakhtyar, S.H. Meraji, D.A. Barry, A. Yeganeh-Bakhtiary and L. Li, An Application of Evolutionary Optimization Algorithms for determining concentration an Velocity Profiles in Sheet Flows an Overlying Layers, Journal of Offshore Mechanics an Arctic Engineering, 134(2), (May, 2012),21802-21812.

[4] T. Bouktir, L. Slimani and M. Belkacemi, A Genetic Algorithm for Solving the Optimal Power Flow problem, Leonardo Journal of Sciences, 3(4), (2004), 44-58.

[5] M. Davidson, Portfolio Optimization and Linear Programming, Journal of Money, Investment and Banking, 20, (2011), 129-137.

[6] A. Fernandez and S. Gomez, Portfolio Selection Using Neutral Network,Computers & Operations Research, 34(4), (2007),1177-1191.

[7] M. Garkaz, The selection and optimization of stock portfolio using genetic algorithm based on mean-semi variance model, International Conference onEconomics and Finance Reaserch, IPEDR, LACSIT Press, Singapore, 4, (2011), 379-381.

[8] J.H. Holland, Adaption in Natural and Artificial Systems, University of Michigan Press, 1975.

[9] A. Laraschj and A. Tettamanzi, An evolutionary algorithm for portfolio selection within the downside risk framework, in Dunis (ed.), Forcasting Financial Markets, John Wiley and Sons, 1996.

[10] Chi-Ming Lin and Mitsuo Gen, An effective Decision-based Genetic in Multi-objective Portfolio Optimization Problem, Applied Mathematical Sciences, 1(5), (2007), 201-210.

[11] Dans Lin, Xiaoming Li and Mingiang Li, A Genetic Algorithm for Solving Portfolio Optimization problems With Transactions Costs and Minimum Transactions Lots, Proceedings of the First international conference on Advances in Natural Computation ICNC'05, Publisher Springer-Verlag Berlin, Heidelberg, 3, (2005), 808-811.

[12] S. Mahfoud and G. Mani, Financial Forecasting Using Genetic Algorithms, Journal of Applied Artificial Intelligence, 10(6), (1996), 543-565.

[13] H. Markowitz, Portfolio selection, Journal of Finance, 7, (March, 1952), 77-91.

[14] Robert Pereira, Genetic Algorithm Optimization for Finance and Investments, MPRA Paper, 8610, University Library of Munich, Germany, (February, 2000).

[15] V. Petridis, Spyros Kazardis and Anastarios Bakirtzis, Varying Fitness Functions in Genetic Algorithm Constrained Optimization: The Cutting Stock and Unit Commitment Problems, IEEE Transactions on Systems, Man, and Cybernetics-Part B, Cybernetics, 28(5), (1998), 629-640.

[16] Felix Roudier, Portfolio optimization and genetic algorithms, Master’s thesis,Department of Management, Technology and Economics, Swiss Federal Institute of Technology (ETM), Zurich, 2006.

[17] Sawati Binti Abdul Ghani, An Application of Genetic Algorithm in Finance, Thesis submitted in fulfillment of the requirements for Bachelor of Science (Hons) Intelligent System Faculty of Information Technology And Quantitative Sciences, Universiti Teknologi MARA, 2005.

[18] T. Vallée and Murat Yildizoglu, Présentation des algorithmes génétiques et leurs applications en économie, Revue d’économie politique, 4(2), (December, 2003).

[19] X. Yang, Improving portfolio efficiency: a Genetic Algorithm Approach, Computational Economics, Springer Link, 28(1), (2006), 1-14.