Optimal Portfolio Selection

The selection of an optimal portfolio is a typical decision problem, and as such, its solution consists of the following elements: the identification of a set of alternatives, using selection criteria to sort through the different possibilities, and finally the solution of the problem. Dynamic Programming (DP) represents a set of algorithms that can be used to calculate an optimal policy given a perfect model of the environment in the form of a MarkovDecision Process (MDP). The DP methods update the estimates of the values of the states—based on the estimates of the values of the successor states—or update the estimates on the basis of past estimates. In DP, an optimization problem is decomposed into simpler subproblems, and the solution for each subproblem is stored so that each subproblem is solved only once. In this chapter, we will...