A novel exact solution algorithm for a robust product portfolio problem under return uncertainty

Abstract

This research address the optimization of product portfolio problem under uncertainty using the principles of financial portfolios theory. Since the success of the product portfolio is a strategic decision and it depends on the return’s future changes, the return is best to be considered as an uncertain parameter. The innovation of this research is the use of robust optimization approach and providing an exact solution algorithm based on the model of Bertsimas and Sim. Given the assumption of uncertainty in the returns, the product portfolio model is developed based on the robust counterpart formulation of Bertsimas and Sim. An exact solution algorithm is also presented to reduce the solution time. The results obtained by implementing in a real case study of the dairy industry in Iran show that increasing the confidence level decreases the portfolio’s total returns and increases its total risk. A comparison between the proposed algorithm and similar methods shows that, on average, it makes 3% improvement in the solution time.