Multi-stage stochastic linear programs for portfolio optimization

The paper demonstrates how multi-period portfolio optimization problems can be efficiently solved as multi-stage stochastic linear programs. A scheme based on a blending of classical Benders decomposition techniques and a special technique, called importance sampling, is used to solve this general class of multi-stochastic linear programs. We discuss the case where stochastic parameters are dependent within a period as well as between periods. Initial computational results are presented.Research and reproduction of this report were partially supported by the Office of Naval Research Contract N00014-89-J-1659; the National Science Foundation Grants ECS-8906260, DMS-8913089, the Electric Power Research Institute Contract RP-8010-09, CSA-4O05335, and the Austrian Science Foundation, Fonds zur Förderung der wissenschaftlichen Forschung, Grant J0323-Phy. Any opinions, findings, and conclusions or recommendations expressed in this publication are those of the authors and do NOT necessarily reflect the views of the above sponsors. The comments of anonymous referees are gratefully acknowledged.