Local Search Techniques for Constrained Portfolio Selection Problems.

We consider the problem of selecting a portfolio of assets that provides the investor a suitable balance of expected return and risk. With respect to the seminal mean-variance model of Markowitz, we consider additional constraints on the cardinality of the portfolio and on the quantity of individual shares. Such constraints better capture the real-world trading system, but make the problem more difficult to be solved with exact methods. We explore the use of local search techniques, mainly tabu search, for the portfolio selection problem. We compare the combine previous work on portfolio selection that makes use of the local search approach and we propose new algorithms that combined different neighborhood relations. In addition, we show how the use of randomization and of a simple form of adaptiveness simplifies the setting of a large number of critical parameters. Finally, we show how our techniques perform on public benchmarks. Copyright 2002 by Kluwer Academic Publishers