On the Computation of the Efficient Frontier of the Portfolio Selection Problem

Abstract

An easy‐to‐use procedure is presented for improving the ε‐constraint method for computing the efficient frontier of the portfolio selection problem endowed with additional cardinality and semicontinuous variable constraints. The proposed method provides not only a numerical plotting of the frontier but also an analytical description of it, including the explicit equations of the arcs of parabola it comprises and the change points between them. This information is useful for performing a sensitivity analysis as well as for providing additional criteria to the investor in order to select an efficient portfolio. Computational results are provided to test the efficiency of the algorithm and to illustrate its applications. The procedure has been implemented in Mathematica.

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