Portfolio Selection and Transactions Costs

Authors:
Michael J. Best;Jaroslava Hlouskova
Affiliations:
Department of Combinatorics and Optimization, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada. mjbest@math.uwaterloo.ca;Department of Economics and Finance, Institute for Advanced Studies, Stumpergasse 56 A-1060, Vienna, Austria. hlouskov@ihs.ac.at
Venue:
Computational Optimization and Applications
Year:
2003

Citing 2
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Abstract

This paper deals with the portfolio selection problem of risky assets with a diagonal covariance matrix, upper bounds on all assets and transactions costs. An algorithm for its solution is formulated which terminates in a number of iterations that is at most three times the number of assets. The efficient portfolios, under appropriate assumptions, are shown to have the following structure. As the risk tolerance parameter increases, an asset's holdings increases to its target, then stays there for a while, then increases to its upper bound, reaches it and stays there. Then the holdings of the asset with the next highest expected return proceeds in a similar way and so on.