Upcoming SlideShare
×

# Optimization By Simulated Annealing

831 views

Published on

My first paper, published in GARP\'s flagship magazine.

0 Likes
Statistics
Notes
• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

• Be the first to like this

Views
Total views
831
On SlideShare
0
From Embeds
0
Number of Embeds
7
Actions
Shares
0
22
0
Likes
0
Embeds 0
No embeds

No notes for slide

### Optimization By Simulated Annealing

1. 1. G L O B A L A S S O C I AT I O N O F R I S K P R O F E S S I O N A L S P O R T F O L I O O P T I M I Z AT I O N Optimization by Simulated Annealing If you are searching for portfolios that offer optimal combinations of risk and return, simulated annealing (SA) can prove a useful tool. Vallabh Muralikrishnan defines SA, explains the challenges posed by portfolio optimization and provides step-by-step instructions for implementing an SA algorithm. he introduction of the Markowitz Efficient tify mathematically the portfolio (i.e., the combination of T Frontier more than 50 years ago popularized the use of mathematical optimization techniques in finance. The central idea of portfolio optimiza- tion is that if the risk and return of available financial instruments could be quantified accu- rately, then portfolios that minimize risk for target levels of return could be identified. Thus, portfolio optimization comprises two distinct problems: the first problem is to decide on measures of risk and return and to quantify the available instruments) that has optimal risk-return charac- teristics. One challenge in addressing the second problem is that the number of potential portfolios grows exponentially with the number of available instruments. For example, a portfolio manager with only 200 instruments can construct 2200 potential portfolios. Enumerating and considering each potential portfolio is impractical because of computing time constraints. Also, the complexity of the risk-return risk-return relationship of a portfolio; the second is to iden- function could exclude the possibility of effectively using GLOBAL ASSOCIATION OF RISK PROFESSIONALS 45