Algorithms for Solving Financial Portfolio Design Problems

2020 ◽  
Author(s):  
Fatima Zohra Lebbah

Any financial institution is in charge of assigning to a client's portfolio a set of assets in a reliable way by minimizing the risk of loss and maximizing gain. All portfolios should share in an equitable way risky assets and safe assets with respect to a financial structured product such as CDO2 (collateralized debt obligation squared). Realizing a balanced portfolio requires a good level of diversification on the chosen assets. Many works have made proposals for modeling and solving the (OPD) problem, but each one has taken into account specific types of risks and cases. However, in this chapter, the authors introduce the problem in a general way by using the CDO2 structure. The authors focus in this chapter on the basic and useful notions of financial engineering, followed by a description of the financial portfolio structure CDO2, the most used and structured financial product. The chapter introduces the financial portfolio optimization problem through the CDO2 structure, the effect of the diversification on the efficiency of the financial portfolio.


Author(s):  
Sudhansu Kumar Mishra ◽  
Ganapati Panda ◽  
Sukadev Meher ◽  
Ritanjali Majhi

2015 ◽  
Vol 6 (2) ◽  
pp. 1-17 ◽  
Author(s):  
Fatima Zohra Lebbah ◽  
Yahia Lebbah

This paper introduces a local search optimization technique for solving efficiently a financial portfolio design problem which consists to affect assets to portfolios, allowing a compromise between maximizing gains and minimizing losses. This practical problem appears usually in financial engineering, such as in the design of CDO-squared portfolios. This problem has been modeled by Flener et al. who proposed an exact method to solve it. It can be formulated as a quadratic program on the 0-1 domain. It is well known that exact solving approaches on difficult and large instances of quadratic integer programs are known to be inefficient. That is why this work has adopted a local search method. It proposes neighborhood and evaluation functions specialized on this problem. To boost the local search process, it also proposes a greedy algorithm to start the search with an optimized initial configuration. Experimental results on non-trivial instances of the problem show the effectiveness of this work's approach.


This chapter introduces a VNS-based local search for solving efficiently a financial portfolio design problem described in Chapter 1 and modeled in Chapter 3. The mathematical model tackled is a 0-1 quadratic model. It is well known that exact solving approaches on large instances of this kind of model are costly. The authors have proposed local search approaches to solve the problem, and the efficiency of this type of method has been proved. This chapter shows that the matricial 0-1 model of the problem enables specialized VNS algorithms by taking into account the particular structure of the financial problem considered. First experiments show that VNS with simulated annealing is effective on non-trivial instances of the problem.


Author(s):  
R. Subbu ◽  
P.P. Bonissone ◽  
N. Eklund ◽  
S. Bollapragada ◽  
K. Chalermkraivuth

This chapter applies different models to the financial portfolio design problem that affect assignment of assets to portfolios subject to a compromise between maximizing gains and minimizing losses. This practical problem appears in financial engineering, such as in the design of a CDO Squared portfolio. The aim of the authors is to propose and to solve a general model corresponding to the problem, within well classified assets. The authors express the diversification problem through a panoply of models such as the set model, matricial model, and MiniZinc model. These models represent an optimized problem of building efficient financial portfolios by maximizing the diversification rate. As long as the diversification rate is increased, the profit is increased, and the risk rate is decreased.


2006 ◽  
Vol 34 (3) ◽  
pp. 170-194 ◽  
Author(s):  
M. Koishi ◽  
Z. Shida

Abstract Since tires carry out many functions and many of them have tradeoffs, it is important to find the combination of design variables that satisfy well-balanced performance in conceptual design stage. To find a good design of tires is to solve the multi-objective design problems, i.e., inverse problems. However, due to the lack of suitable solution techniques, such problems are converted into a single-objective optimization problem before being solved. Therefore, it is difficult to find the Pareto solutions of multi-objective design problems of tires. Recently, multi-objective evolutionary algorithms have become popular in many fields to find the Pareto solutions. In this paper, we propose a design procedure to solve multi-objective design problems as the comprehensive solver of inverse problems. At first, a multi-objective genetic algorithm (MOGA) is employed to find the Pareto solutions of tire performance, which are in multi-dimensional space of objective functions. Response surface method is also used to evaluate objective functions in the optimization process and can reduce CPU time dramatically. In addition, a self-organizing map (SOM) proposed by Kohonen is used to map Pareto solutions from high-dimensional objective space onto two-dimensional space. Using SOM, design engineers see easily the Pareto solutions of tire performance and can find suitable design plans. The SOM can be considered as an inverse function that defines the relation between Pareto solutions and design variables. To demonstrate the procedure, tire tread design is conducted. The objective of design is to improve uneven wear and wear life for both the front tire and the rear tire of a passenger car. Wear performance is evaluated by finite element analysis (FEA). Response surface is obtained by the design of experiments and FEA. Using both MOGA and SOM, we obtain a map of Pareto solutions. We can find suitable design plans that satisfy well-balanced performance on the map called “multi-performance map.” It helps tire design engineers to make their decision in conceptual design stage.


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