Using column generation to solve extensions to the Markowitz model

Abstract

We introduce a solution scheme for portfolio optimization problems with cardinality constraints. Typical portfolio optimization problems are extensions of the classical Markowitz mean–variance portfolio optimization model. We solve such types of problems using a method similar to column generation. In this scheme, the original problem is restricted to a subset of the assets resulting in a master convex quadratic problem. Then the dual information of the master problem is used in a subproblem to propose more assets to consider. We also consider other extensions to the Markowitz model to diversify the portfolio selection within given intervals for active weights.