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An Evolutionary Optimization Approach to Risk Parity Portfolio Selection

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  • Ronald Hochreiter

Abstract

In this paper we present an evolutionary optimization approach to solve the risk parity portfolio selection problem. While there exist convex optimization approaches to solve this problem when long-only portfolios are considered, the optimization problem becomes non-trivial in the long-short case. To solve this problem, we propose a genetic algorithm as well as a local search heuristic. This algorithmic framework is able to compute solutions successfully. Numerical results using real-world data substantiate the practicability of the approach presented in this paper.

Suggested Citation

  • Ronald Hochreiter, 2014. "An Evolutionary Optimization Approach to Risk Parity Portfolio Selection," Papers 1411.7494, arXiv.org, revised Jan 2015.
  • Handle: RePEc:arx:papers:1411.7494
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    File URL: http://arxiv.org/pdf/1411.7494
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    References listed on IDEAS

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    1. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. Ledoit, Olivier & Wolf, Michael, 2003. "Improved estimation of the covariance matrix of stock returns with an application to portfolio selection," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 603-621, December.
    4. repec:dau:papers:123456789/4688 is not listed on IDEAS
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    Cited by:

    1. Gilles Boevi Koumou, 2020. "Diversification and portfolio theory: a review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 267-312, September.
    2. Gianni Filograsso & Giacomo Tollo, 2023. "Adaptive evolutionary algorithms for portfolio selection problems," Computational Management Science, Springer, vol. 20(1), pages 1-38, December.

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