Resampled Efficient Frontier Integration for MOEAs

• Published in: Entropy (Basel, Switzerland) Vol. 23; no. 4; p. 422
• Main Authors: Quintana, David, Moreno, David
• Format: Journal Article
• Language: English
• Published: Switzerland MDPI AG 31.03.2021; MDPI
• Subjects: Asset allocation; Composition; Evolutionary algorithms; finance; Genetic algorithms; MOEA; Optimization; porfolio optimization; Resampling; robustness; robustness; MOEA; porfolio optimization; finance
• ISSN: 1099-4300; 1099-4300
• DOI: 10.3390/e23040422

Mean-variance portfolio optimization is subject to estimation errors for asset returns and covariances. The search for robust solutions has been traditionally tackled using resampling strategies that offer alternatives to reference sets of returns or risk aversion parameters, which are subsequently combined. The issue with the standard method of averaging the composition of the portfolios for the same risk aversion is that, under real-world conditions, the approach might result in unfeasible solutions. In case the efficient frontiers for the different scenarios are identified using multiobjective evolutionary algorithms, it is often the case that the approach to averaging the portfolio composition cannot be used, due to differences in the number of portfolios or their spacing along the Pareto front. In this study, we introduce three alternatives to solving this problem, making resampling with standard multiobjective evolutionary algorithms under real-world constraints possible. The robustness of these approaches is experimentally tested on 15 years of market data.