A Cholesky decomposition-based asset selection heuristic for sparse tangent portfolio optimization
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arXiv
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| Autores principales: | , , , , |
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| Formato: | Preprint |
| Publicado: |
2025
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| _version_ | 1866909496878563328 |
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| author | Bae, Hyunglip Jeon, Haeun Park, Minsu Lee, Yongjae Kim, Woo Chang |
| author_facet | Bae, Hyunglip Jeon, Haeun Park, Minsu Lee, Yongjae Kim, Woo Chang |
| contents | In practice, including large number of assets in mean-variance portfolios can lead to higher transaction costs and management fees. To address this, one common approach is to select a smaller subset of assets from the larger pool, constructing more efficient portfolios. As a solution, we propose a new asset selection heuristic which generates a pre-defined list of asset candidates using a surrogate formulation and re-optimizes the cardinality-constrained tangent portfolio with these selected assets. This method enables faster optimization and effectively constructs portfolios with fewer assets, as demonstrated by numerical analyses on historical stock returns. Finally, we discuss a quantitative metric that can provide a initial assessment of the performance of the proposed heuristic based on asset covariance. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2502_11701 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | A Cholesky decomposition-based asset selection heuristic for sparse tangent portfolio optimization Bae, Hyunglip Jeon, Haeun Park, Minsu Lee, Yongjae Kim, Woo Chang Mathematical Finance Portfolio Management In practice, including large number of assets in mean-variance portfolios can lead to higher transaction costs and management fees. To address this, one common approach is to select a smaller subset of assets from the larger pool, constructing more efficient portfolios. As a solution, we propose a new asset selection heuristic which generates a pre-defined list of asset candidates using a surrogate formulation and re-optimizes the cardinality-constrained tangent portfolio with these selected assets. This method enables faster optimization and effectively constructs portfolios with fewer assets, as demonstrated by numerical analyses on historical stock returns. Finally, we discuss a quantitative metric that can provide a initial assessment of the performance of the proposed heuristic based on asset covariance. |
| title | A Cholesky decomposition-based asset selection heuristic for sparse tangent portfolio optimization |
| topic | Mathematical Finance Portfolio Management |
| url | https://arxiv.org/abs/2502.11701 |