Author(s)

Josephine M. Masese, Ferdinand Othieno, Carolyn Njenga

Institute of Mathematical Sciences, Strathmore University, Nairobi, Kenya.

Several improvements and alternatives to Mean Variance Optimization (MVO) have been suggested and used since its inception in 1952. The improvements have mostly included addition of constraints to the traditional MVO model, using alternative risk measures and using non risk-reward models. This paper seeks to compare MVO against the Threshold Accepting model, which is a general optimization model, in portfolio selection. Using data on 29 stocks in the Kenyan stock market we compare the relative performance of the two models using performance measures such as the Sharpe Ratio, Sortino Ratio and Information Ratio. We find that the Threshold Accepting (TA) model outperforms the Mean-Variance Optimization model though MVO yields similar results when we use monthly or weekly data but the latter is observed as a more consistent model. The TA model has portfolios with generally more superior risk-adjusted returns for the full period and during periods of high volatility in the stock market performance market. This observation implies that relatively more attention should be given to the TA model rather than relying entirely on the classical MVO approach.

Mean-Variance Optimization, Threshold Accepting, Frontier Market

Masese, J. , Othieno, F. and Njenga, C. (2017) Portfolio Optimization under Threshold Accepting: Further Evidence from a Frontier Market. Journal of Mathematical Finance, 7, 941-957. doi: 10.4236/jmf.2017.74052.