Analytical Models for Investment Portfolio Optimization

  • Authors

    • Johan Håstad's mentor Arne Andersson Professor, Uppsala University, Sweden. Author
    • Börje Langefors Professor of Information Systems, Stockholm University, Sweden. Author

    DOI:

    https://doi.org/10.67228/3071642X/IJCFDE-2024PI5P8H

    Published 05-03-2024

  • Investment Portfolio Optimization, Portfolio Theory, Mean-Variance Optimization, Risk Management, Asset Allocation, Financial Analytics, Mathematical Optimization, Investment Decision Support, Portfolio Diversification, Risk-Adjusted Return

    Issue

    Vol. 7 No. 1 (2024)

    Section

    Articles

    How to Cite

    Andersson, J. H. mentor A., & Langefors, B. (2024). Analytical Models for Investment Portfolio Optimization. International Journal of Commerce, Finance and Digital Economy, 7(1), 01-17. https://doi.org/10.67228/3071642X/IJCFDE-2024PI5P8H

  • Abstract

    Investment portfolio optimization has become essential for managing risk and maximizing returns in increasingly complex and volatile financial markets. Traditional portfolio selection methods often relied on intuition, whereas modern analytical models use quantitative techniques such as mean-variance optimization, Capital Asset Pricing Model (CAPM), multi-factor models, and stochastic optimization to support informed investment decisions. This study presents a comprehensive analytical framework that integrates financial data preprocessing, risk estimation, portfolio optimization, and performance evaluation using metrics such as expected return, portfolio variance, Sharpe ratio, Value at Risk (VaR), and diversification efficiency. The framework enables dynamic portfolio rebalancing by continuously analyzing market conditions and adjusting investment strategies. Experimental results demonstrate that analytical optimization methods outperform traditional allocation approaches by improving returns, reducing risk, enhancing diversification, and increasing investment stability. The study concludes that combining mathematical optimization with statistical financial analysis provides a reliable foundation for intelligent portfolio management, while future integration with Artificial Intelligence (AI), Big Data, Reinforcement Learning, and sustainable investment strategies will further enhance investment decision-making.

  • References

    [1] H. Markowitz, "Portfolio Selection," Journal of Finance, vol. 7, no. 1, pp. 77–91, Mar. 1952.

    [2] W. F. Sharpe, "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk," Journal of Finance, vol. 19, no. 3, pp. 425–442, Sep. 1964.

    [3] J. Lintner, "The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets," Review of Economics and Statistics, vol. 47, no. 1, pp. 13–37, Feb. 1965.

    [4] E. F. Fama and K. R. French, "Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics, vol. 33, no. 1, pp. 3–56, Feb. 1993.

    [5] W. F. Sharpe, "The Sharpe Ratio," Journal of Portfolio Management, vol. 21, no. 1, pp. 49–58, Fall 1994.

    [6] F. A. Sortino and R. van der Meer, "Downside Risk," Journal of Portfolio Management, vol. 17, no. 4, pp. 27–31, Summer 1991.

    [7] P. Jorion, Value at Risk: The New Benchmark for Managing Financial Risk, 3rd ed. New York, NY, USA: McGraw-Hill, 2007.

    [8] R. T. Rockafellar and S. Uryasev, "Optimization of Conditional Value-at-Risk," Journal of Risk, vol. 2, no. 3, pp. 21–41, 2000.

    [9] H. Konno and H. Yamazaki, "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, vol. 37, no. 5, pp. 519–531, May 1991.

    [10] T. J. Stewart, Robust Portfolio Optimization and Management. Hoboken, NJ, USA: Wiley, 2013.

    [11] C. M. Bishop, Pattern Recognition and Machine Learning. New York, NY, USA: Springer, 2006.

    [12] L. Breiman, "Random Forests," Machine Learning, vol. 45, no. 1, pp. 5–32, Oct. 2001.

    [13] J. Kennedy and R. Eberhart, "Particle Swarm Optimization," in Proc. IEEE Int. Conf. Neural Networks (ICNN), Perth, Australia, 1995, pp. 1942–1948.

    [14] D. E. Goldberg, Genetic Algorithms in Search, Optimization, and Machine Learning. Reading, MA, USA: Addison-Wesley, 1989.

    [15] Z. Zhang, S. Zohren, and S. Roberts, "Deep Learning for Portfolio Optimization," Journal of Financial Data Science, vol. 2, no. 4, pp. 8–20, 2020.

  • Downloads

Similar Articles

21-30 of 89

You may also start an advanced similarity search for this article.