An algorithm for portfolio selection in a frictional market

摘要

Absolute deviation is utilized as a measure of risk and a new function is provided for it. We consider the mean-absolute deviation (MAD) portfolio optimization problem in a frictional market with additional constraints representing the so-called short sales. An algorithm for solving the optimization problem is thus presented, which uses the special structure of the original problem to reduce to a linear programming. The numerical test shows the validity of the method.