Multiperiod stochastic programming portfolio optimization for diversified funds
Contributing USMA Research Unit(s)
Army Cyber Institute, Center for Data Analysis and Statistics, Operations Research Center, Systems Engineering
We investigate a multiperiod, stochastic portfolio optimization model for diversified funds choices associated with traditional 401K or 403B plans. This optimization model minimizes the L1‐norm for negative return rate risk (the downside mean absolute deviation) while examining parameters that maintain model feasibility. Important components of the model are the incorporation of appropriate time‐series components and evaluation of scenarios based on investor outlook. A case study experimentation of the model on five potential investment funds using historical data from 2003 to 2013 was conducted, and parameter constraints for diversification and minimum acceptable return rates were manipulated to produce contour plots. The maximum geometric rate of return investment strategy provided by the optimization would have resulted in a 9.7% geometric return rate in 2014 as compared with a 5.0% for a uniform distribution of investment funds across choices.
Fulton, Lawrence V. and Bastian, Nathaniel D., "Multiperiod stochastic programming portfolio optimization for diversified funds" (2018). USMA Research Papers. 58.