Abstract
The multi-objective portfolio optimization problem is not easy to solve because of (i) challenges from the complexity that arises due to conflicting objectives, (ii) high occurrence of non-dominance of solutions based on the dominance relation, and (iii) optimization solutions that often result in under-diversification. This paper experiments the use of multi-objective genetic algorithms (MOGAs), namely, the non-dominated sorting genetic algorithm II (NSGA-II), strength Pareto evolutionary algorithm II (SPEA-II) and newly proposed compressed objective genetic algorithm II (COGA-II) for solving the portfolio optimization problem for a power generation company (GenCo) faced with different trading choices. To avoid under-diversification, an additional objective to enhance the diversification benefit is proposed alongside with the three original objectives of the mean–variance–skewness (MVS) portfolio framework. The results show that MOGAs have made possible the inclusion of the fourth objective within the optimization framework that produces Pareto fronts that also cover those based on the traditional MVS framework, thereby offering better trade-off solutions while promoting investment diversification benefits for power generation companies.
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