An Estimation of Distribution Algorithm Based Portfolio Selection Approach

Abstract

A portfolio selection problem is about finding an optimal scheme to allocate a fixed amount of capital to a set of available assets. The optimal scheme is very helpful for investors in making decisions. However, finding the optimal scheme is difficult and time-consuming especially when the number of assets is large and some actual investment constraints are considered. This paper proposes a new approach based on estimation of distribution algorithms (EDAs) for solving a cardinality constrained portfolio selection (CCPS) problem. The proposed algorithm, termed PBIL-CCPS, hybridizes an EDA called population-based incremental learning (PBIL) algorithm and a continuous PBIL (PBILc) algorithm, to optimize the selection of assets and the allocation of capital respectively. The proposed algorithm adopts an adaptive parameter control strategy and an elitist strategy. The performance of the proposed algorithm is compared with a genetic algorithm and a particle swarm optimization algorithm. The results demonstrate that the proposed algorithm can achieve a satisfactory result for portfolio selection and perform well in searching nondominated portfolios with high expected returns.