Abstract
We apply Markowitz portfolio theory to Mongolian economy in order to define optimal budget structure. We assume that the government revenue is a portfolio consisting of seven major taxes and non-tax revenues. We minimize the variance of the portfolio under fixed return of the government revenue. This optimization problem has been solved by the conditional gradient method on MATLAB. Computational results based on Mongolian economic data are provided.
Highlights
Financial portfolio optimization is widely used in mathematics, statistics, economics and engineering
We assume that the government revenue is a portfolio consisting of seven major taxes and non-tax revenues
This optimization problem has been solved by the conditional gradient method on MATLAB
Summary
Financial portfolio optimization is widely used in mathematics, statistics, economics and engineering. Fundamental breakthrough in the problem of asset allocation and portfolio optimization is dated to Markowitz’s Modern Portfolio Theory [1] It considers rational investors and models with the problem of minimizing the mean-variance of the portfolio with a fixed value for the expected return on the entire portfolio. There are many works devoted to optimization methods and algorithms for solving the portfolio variance minimization problem. Sharpe’s Capital Asset Pricing Model (CAPM) [14] takes into account the asset’s sensitivity to non-diversifiable risk while it is being added to an already existing well-diversified portfolio It considers the importance of the covariance structure of the returns, the variance of the portfolio and the market premium. [5] presents a multi-period scenario generation approach to support portfolio optimization and [20] discusses scenario generation, mathematical models and algorithms for the portfolio optimization problem. We implement Markowitz model for Mongolian government budget
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