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Portfolio Optimization under Cardinality Constraints: A Comparative Study

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Document pages: 12 pages

Abstract: The Cardinality Constraint-Based Optimizationproblem is investigated in this note. In portfolio optimization problem, thecardinality constraint allows one to invest in assets out ofa universe of N assets for aprespecified value of K. It isgenerally agreed that choosing a “small” value of K forces the implementation of diversification in small portfolios.However, thequestion of how small must be K hasremained unanswered. In the present work, using a comparative approach we showcomputationally that optimal portfolio selection with a relatively small orlarge number of assets, K, mayproduce similar results with differentiated reliabilities.

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