A review of portfolio planning: Models and systems

In this chapter, we first provide an overview of a number of portfolio planning models which have been proposed and investigated over the last forty years. We revisit the mean-variance (M-V) model of Markowitz and the construction of the risk-return efficient frontier. A piecewise linear approximation of the problem through a reformulation involving diagonalisation of the quadratic form into a variable separable function is also considered. A few other models, such as, the Mean Absolute Deviation (MAD), the Weighted Goal Programming (WGP) and the Minimax (MM) model which use alternative metrics for risk are also introduced, compared and contrasted. Recently asymmetric measures of risk have gained in importance; we consider a generic representation and a number of alternative symmetric and asymmetric measures of risk which find use in the evaluation of portfolios. There are a number of modelling and computational considerations which have been introduced into practical portfolio planning problems. These include: (a) buy-in thresholds for assets, (b) restriction on the number of assets (cardinality constraints), (c) transaction roundlot restrictions. Practical portfolio models may also include (d) dedication of cashflow streams, and, (e) immunization which involves duration matching and convexity constraints. The modelling issues in respect of these features are discussed. Many of these features lead to discrete restrictions involving zero-one and general integer variables which make the resulting model a quadratic mixed-integer programming model (QMIP). The QMIP is a NP-hard problem; the algorithms and solution methods for this class of problems are also discussed. The issues of preparing the analytic data (financial datamarts) for this family of portfolio planning problems are examined. We finally present computational results which provide some indication of the state-of-the-art in the solution of portfolio optimisation problems

Processing second-order stochastic dominance models using cutting-plane representations

This is the post-print version of the Article. The official published version can be accessed from the links below. Copyright @ 2011 Springer-VerlagSecond-order stochastic dominance (SSD) is widely recognised as an important decision criterion in portfolio selection. Unfortunately, stochastic dominance models are known to be very demanding from a computational point of view. In this paper we consider two classes of models which use SSD as a choice criterion. The first, proposed by Dentcheva and Ruszczyński (J Bank Finance 30:433–451, 2006), uses a SSD constraint, which can be expressed as integrated chance constraints (ICCs). The second, proposed by Roman et al. (Math Program, Ser B 108:541–569, 2006) uses SSD through a multi-objective formulation with CVaR objectives. Cutting plane representations and algorithms were proposed by Klein Haneveld and Van der Vlerk (Comput Manage Sci 3:245–269, 2006) for ICCs, and by Künzi-Bay and Mayer (Comput Manage Sci 3:3–27, 2006) for CVaR minimization. These concepts are taken into consideration to propose representations and solution methods for the above class of SSD based models. We describe a cutting plane based solution algorithm and outline implementation details. A computational study is presented, which demonstrates the effectiveness and the scale-up properties of the solution algorithm, as applied to the SSD model of Roman et al. (Math Program, Ser B 108:541–569, 2006).This study was funded by OTKA, Hungarian National Fund for Scientific Research, project 47340; by Mobile Innovation Centre, Budapest University of Technology, project 2.2; Optirisk Systems, Uxbridge, UK and by BRIEF (Brunel University Research Innovation and Enterprise Fund)

Parallel symbolic state-space exploration is difficult, but what is the alternative?

State-space exploration is an essential step in many modeling and analysis problems. Its goal is to find the states reachable from the initial state of a discrete-state model described. The state space can used to answer important questions, e.g., "Is there a dead state?" and "Can N become negative?", or as a starting point for sophisticated investigations expressed in temporal logic. Unfortunately, the state space is often so large that ordinary explicit data structures and sequential algorithms cannot cope, prompting the exploration of (1) parallel approaches using multiple processors, from simple workstation networks to shared-memory supercomputers, to satisfy large memory and runtime requirements and (2) symbolic approaches using decision diagrams to encode the large structured sets and relations manipulated during state-space generation. Both approaches have merits and limitations. Parallel explicit state-space generation is challenging, but almost linear speedup can be achieved; however, the analysis is ultimately limited by the memory and processors available. Symbolic methods are a heuristic that can efficiently encode many, but not all, functions over a structured and exponentially large domain; here the pitfalls are subtler: their performance varies widely depending on the class of decision diagram chosen, the state variable order, and obscure algorithmic parameters. As symbolic approaches are often much more efficient than explicit ones for many practical models, we argue for the need to parallelize symbolic state-space generation algorithms, so that we can realize the advantage of both approaches. This is a challenging endeavor, as the most efficient symbolic algorithm, Saturation, is inherently sequential. We conclude by discussing challenges, efforts, and promising directions toward this goal

Solution of Optimal Power Flow Problems using Moment Relaxations Augmented with Objective Function Penalization

The optimal power flow (OPF) problem minimizes the operating cost of an electric power system. Applications of convex relaxation techniques to the non-convex OPF problem have been of recent interest, including work using the Lasserre hierarchy of "moment" relaxations to globally solve many OPF problems. By preprocessing the network model to eliminate low-impedance lines, this paper demonstrates the capability of the moment relaxations to globally solve large OPF problems that minimize active power losses for portions of several European power systems. Large problems with more general objective functions have thus far been computationally intractable for current formulations of the moment relaxations. To overcome this limitation, this paper proposes the combination of an objective function penalization with the moment relaxations. This combination yields feasible points with objective function values that are close to the global optimum of several large OPF problems. Compared to an existing penalization method, the combination of penalization and the moment relaxations eliminates the need to specify one of the penalty parameters and solves a broader class of problems.Comment: 8 pages, 1 figure, to appear in IEEE 54th Annual Conference on Decision and Control (CDC), 15-18 December 201