Title: Mathematical models and a tabu search for the portfolio management problem in the Kuwait stock exchange

Authors: Majid M. Aldaihani, Talla M. Al-Deehani

Addresses: Department of Industrial and Management Systems Engineering, College of Engineering and Petroleum, Kuwait University, P.O. Box 5969 Safat 13060, Kuwait. ' Department of Finance and Financial Institutions, College of Business Administration, Kuwait University, P.O. Box 5969, Safat 13060, Kuwait

Abstract: This article proposes two mathematical models to study and compare results of two cases of the portfolio selection problem in the Kuwait stock exchange (KSE) as an emerging market. The mathematical models attempt to balance the trade off between risk and return. Model-I maximises the expected return and maintains the risk to certain limits while Model-II minimises the portfolio correlation and constrains the expected return to a minimum acceptable level. Since, both models are turned out to be non-linear, a tailored tabu search algorithm is used to provide efficient solutions with reasonable amount of computational times. After testing the models using real data from KSE, the results indicated that Model-I is able to significantly beat the market using both quarterly and annual basis strategies.

Keywords: mathematical modelling; optimisation; portfolio management; tabu search; Kuwait stock exchange; portfolio selection; emerging markets.

DOI: 10.1504/IJOR.2010.032421

International Journal of Operational Research, 2010 Vol.7 No.4, pp.445 - 462

Available online: 02 Apr 2010 *

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