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Application of robust optimization for a product portfolio problem using an invasive weed optimization algorithm

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  • Product portfolio optimization (PPO) is a strategic decision for many organizations. There are several technical methods for facilitating this decision. According to the reviewed studies, the implementation of the robust optimization approach and the invasive weed optimization (IWO) algorithm is the research gap in this field. The contribution of this paper is the development of the PPO problem with the help of the robust optimization approach and the multi-objective IWO algorithm. Considering the profit margin uncertainty in real-world investment decisions, the robust optimization approach is used to address this issue. To illustrate the real-world applicability of the model, it is implemented for dairy products of Pegah Golpayegan Company in Iran. The numerical results obtained from the IWO algorithm demonstrate the effectiveness of the proposed algorithm in tracing out the efficiency frontier of the product portfolio. The average risk of efficient frontier solutions in the deterministic model is about 0.4 and for the robust counterpart formulation is at least 0.5 per product. The efficient frontier solutions obtained from robust counterpart formulation demonstrate a more realistic risk level than the deterministic model. The comparisons between CPLEX, IWO and genetic algorithm (GA) shows that the performance of the IWO algorithm is much better than the older algorithms and can be considered as an alternative to algorithms, such as GA in product portfolio optimization problems.

    Mathematics Subject Classification: Primary: 58F15, 58F17; Secondary: 53C35.

    Citation:

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  • Figure 1.  Pseudocode of IWO algorithm

    Figure 2.  An example of solution representation

    Figure 3.  Efficiency frontier of portfolio selection problem with 10 products

    Figure 4.  Efficiency frontier of portfolio selection problem with 50 products

    Figure 5.  Comparison of objective function values obtained from the deterministic model and the robust models with different uncertainty levels for K = 10

    Figure 6.  Comparison of objective function values obtained from the deterministic model and the robust models with different uncertainty levels for K = 50

    Figure 7.  The execution time of CPLEX, IWO and Ga

    Figure 8.  GA and IWO portfolio efficient frontier

    Table 1.  Optimal setting of IWO Algorithm parameters

    Parameter Symbol Optimal Value
    Max iteration Maxit 100
    Number of first population Npop0 50
    Maximum population size Pmax 100
    Minimum seed Smin 20
    Maximum seed Smax 50
    Reducing power of standard deviation (pu) N 0.01
    Initial standard deviation Sigma_final 0.5
    Final standard deviation Sigma_final 0.1
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    Table 2.  Computational results of CPLEX, GA and IWO in the small-scale problems

    ProblemKCPLEXGAIWO
    ZTZTGAP(%)ZTGAP(%)
    P12-0.6781.6-0.6780.030-0.6780.3470
    P24-1.1125.6-1.1060.1540.54-1.1120.5160
    P36-1.48721.7-1.4710.3031.08-1.4680.6821.28
    P48-1.99279.5-1.9710.5911.05-1.9710.7921.05
    P510-2.786162.1-2.6610.7244.49-2.69140.9983.40
    P612-3.785729.3-3.6621.3713.25-3.6991.9472.27
    P714-5.2111680.9-4.9974.2744.11-5.1063.0422.01
    P816-8.6333600-8.0125.2917.19-8.4755.7081.83
    P918---9.5477.264--9.8278.066-
    P1020---11.28711.919--11.53113.281-
    Average-785.0875-3.19212.1713.53791.184
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    Table 3.  Computational results of GA and IWO in the large-scale problems

    00.10.20.30.40.50.60.70.80.91Risk aversion factor
    8.247.395.994.894.981.531.240.830.820.330.21ReturnGA
    38.0915.37.95.395.182.162.071.591.61.591.58Risk
    10.028.527.366.626.453.12.942.372.351.871.78ReturnIWO
    37.114.587.755.55.012.031.951.61.531.651.54Risk
     | Show Table
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    Table 4.  Summarized results of IWO algorithm for the deterministic portfolio selection problem with 10 products

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.296300.69760-56.996800.95800
    0.11.199260.60310-50.190301.39730
    0.21.178870.49650-40.047001.05580
    0.31.082990.46870-32.992900.95450
    0.41.066060.44740-26.269501.00600
    0.51.022680.44230-18.883700.79310
    0.60.961230.43990-11.059700.96800
    0.70.878970.43960-4.226600.85980
    0.80.876080.438502.915001.02450
    0.90.808530.420708.713600.92530
    10.800430.3965014.143701.03380
    average1.015580.48098-19.535840.99783
     | Show Table
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    Table 5.  Summarized results of IWO algorithm for the robust portfolio selection problem with 10 products ($\rho = 0.2$)

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.215070.66178-51.840800.97237
    0.11.201260.62716-45.593301.44621
    0.21.095690.51388-35.163001.07660
    0.31.093580.49401-26.802901.07190
    0.41.053580.49130-19.267901.10600
    0.51.011670.49102-15.623700.88859
    0.60.940730.48330-8.059901.06238
    0.70.906380.475730.999400.94625
    0.80.868030.463009.805001.15400
    0.90.808830.4510115.944601.22232
    10.793220.4066219.171601.06134
    Average0.998910.50535-14.220991.09163
     | Show Table
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    Table 6.  Summarized results of IWO algorithm for the robust portfolio selection problem with 10 products ($\rho = 0.4$)

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.265270.69400-50.321801.05357
    0.11.204620.64976-45.066901.68514
    0.21.138010.59878-36.048601.13963
    0.31.070960.55574-24.828901.01938
    0.40.995640.53676-18.000801.27179
    0.50.934290.53060-9.884301.01640
    0.60.849200.51546-5.038101.06400
    0.70.839770.48991-0.629601.10240
    0.80.755940.4483410.179001.23596
    0.90.728470.3974216.839601.04254
    10.724230.3917020.170701.20169
    Average0.955130.52804-12.966341.16659
     | Show Table
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    Table 7.  Summarized results of IWO algorithm for the robust portfolio selection problem with 10 products ($\rho = 0.6$)

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.222550.76641-45.061801.24743
    0.11.182290.72025-37.850501.72660
    0.21.093490.72213-32.922601.47810
    0.30.998920.64398-19.874301.36637
    0.40.960530.64205-10.739801.26848
    0.50.925690.57386-1.758301.01640
    0.60.904230.570493.983541.06400
    0.70.853090.566881.540401.10240
    0.80.786590.4553316.305501.21371
    0.90.756710.4317325.855601.27669
    10.752420.4195828.116821.45525
    Average0.948770.59206-6.582311.29231
     | Show Table
    DownLoad: CSV

    Table 8.  Summarized results of IWO algorithm for the deterministic portfolio selection problem with 50 products

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.43270.6733-32.30220.9262
    0.11.33330.6593-29.60121.0732
    0.21.20030.5725-23.48241.0453
    0.31.17570.5570-19.88221.1412
    0.41.16360.5561-15.93301.1919
    0.51.11840.5254-11.21730.7735
    0.61.03640.4975-6.49510.9450
    0.71.02680.4714-2.28120.7081
    0.80.92910.45801.67481.0726
    0.90.90800.42264.61301.0580
    10.89630.40527.74440.9811
    Average1.11100.5271-11.56020.9924
     | Show Table
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    Table 9.  Summarized results of IWO algorithm for the robust portfolio selection problem with 50 products ($\rho = 0.2$)

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.49130.7941-29.20691.1059
    0.11.42430.7584-25.60671.1246
    0.21.31920.6295-19.41841.1503
    0.31.19590.5930-14.71741.2152
    0.41.16030.5929-12.83851.3426
    0.51.10070.5813-4.15611.0164
    0.61.04270.52961.64491.0640
    0.70.94590.48733.84281.1024
    0.80.94560.47726.32381.1423
    0.90.91260.465510.67421.2695
    10.90990.443510.76381.1976
    Average1.13170.5775-6.60861.1573
     | Show Table
    DownLoad: CSV

    Table 10.  Summarized results of IWO algorithm for the robust portfolio selection problem with 50 products ($\rho = 0.4$)

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.49540.8165-27.15321.0138
    0.11.38150.7981-25.33691.1246
    0.21.29730.7045-18.37601.1505
    0.31.18370.6121-13.75621.2547
    0.41.13880.6095-9.93201.2114
    0.51.09320.5819-3.18321.0164
    0.60.99350.5793-0.47911.0640
    0.70.98660.57762.84181.1024
    0.80.95940.513310.78081.3515
    0.90.95040.510612.62531.2808
    10.88170.449611.77541.0439
    Average1.12380.6139-5.47211.1467
     | Show Table
    DownLoad: CSV

    Table 11.  Summarized results of IWO algorithm for the robust portfolio selection problem with 50 products ($\rho = 0.6$)

    Risk aversion factorTotal returnTotal riskObjective function ValueExecution time
    01.41890.8471-26.13821.0433
    0.11.33620.7674-23.47521.1246
    0.21.24200.7352-19.25141.3819
    0.31.19470.7170-12.86061.3767
    0.41.17670.7040-8.86901.3882
    0.51.17660.6931-2.09091.0164
    0.61.14910.66681.52951.0640
    0.71.04110.63382.35881.1024
    0.81.00950.56406.80081.1792
    0.90.94350.501511.64701.2315
    10.91860.445516.96941.6090
    Average1.14610.6614-4.85271.2288
     | Show Table
    DownLoad: CSV
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