Genetic algorithms for portfolio selection problems with minimum transaction lots

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ejor.2006.12.024 Byline: Chang-Chun Lin (a), Yi-Ting Liu (b) Keywords: Portfolio selection; Markowitz model; Minimum transaction lots; Genetic algorithm; Fuzzy multi-objective decision making Abstract: Conventionally, portfolio selection problems are solved with quadratic or linear programming models. However, the solutions obtained by these methods are in real numbers and difficult to implement because each asset usually has its minimum transaction lot. Methods considering minimum transaction lots were developed based on some linear portfolio optimization models. However, no study has ever investigated the minimum transaction lot problem in portfolio optimization based on Markowitz' model, which is probably the most well-known and widely used. Based on Markowitz' model, this study presents three possible models for portfolio selection problems with minimum transaction lots, and devises corresponding genetic algorithms to obtain the solutions. The results of the empirical study show that the portfolios obtained using the proposed algorithms are very close to the efficient frontier, indicating that the proposed method can obtain near optimal and also practically feasible solutions to the portfolio selection problem in an acceptable short time. One model that is based on a fuzzy multi-objective decision-making approach is highly recommended because of its adaptability and simplicity. Author Affiliation: (a) Department of Information Management, Chang Gung University, 259 Wen-Hwa 1st Road, Kwei-Shan, Tao-Yuan 333, Taiwan, ROC (b) Institute of Information Management, National Chiao Tung University, 1001 Ta Hsueh Road, Hsinchu 300, Taiwan, ROC Article History: Received 12 March 2006; Accepted 11 December 2006