Constrained portfolio asset selection using multiobjective bacteria foraging optimization

Abstract

Portfolio asset selection (PAS) is a challenging and interesting multiobjective task in the field of computational finance, and is receiving the increasing attention of researchers, fund management companies and individual investors in the last few decades. Selecting a subset of assets and corresponding optimal weights from a set of available assets, is a key issue in the PAS problem. A Markowitz model is generally used to solve this optimization problem, where the total profit is maximized, while the total risk is to be minimized. However, this model does not consider the practical constraints, such as the minimum buy in threshold, maximum limit, cardinality etc. The Practical constraints are incorporated in this study to meet a real world financial scenario. In the proposed work, the PAS problem is formulated in a multiobjective framework, and solved using the multiobjective bacteria foraging optimization (MOBFO) algorithm. The performance of the proposed approach is compared with a set of competitive multiobjective evolutionary algorithms using six performance metrics, the Pareto front and computational time. On examining the performance metrics, it is concluded that the proposed MOBFO algorithm is capable of identifying a good Pareto solution, maintaining adequate diversity. The proposed algorithm is also successfully applied to different cardinality constraint conditions, for six different market indices.