Exercise 9.4 You currently own a portfolio of eight stocks. Using the Markowitz model, you computed the optimal mean variance portfolio. The weights of these two portfolios are shown in the following table: Stock B D F G H Your portfolio 0.12 0.15 0.13 0.10 0.20 0.10 0.12 0.08 M/V portfolio 0.02 0.05 0.25 0.06 0.18 0.10 0.22 0.12 You would like to rebalance your portfolio in order to be closer to the mean variance portfolio. To avoid excessively high transaction costs, you decide to rebalance only three stocks from your portfolio. Let x4 denote the weight of stock i in your rebalanced portfolio. The objective is to minimize the quantity lari -0.02+ |32 -0.051 + |23 -0.25] + ... + |18 0.121, which measures how closely the rebalanced portfolio matches the mean-variance portfolio Formulate this problem as a mixed integer linear program. Note that you will need to introduce new continuous variables in order to linearize the absolute values and new binary variables in order to impose the constraint that only three stocks are traded. Exercise 9.4 You currently own a portfolio of eight stocks. Using the Markowitz model, you computed the optimal mean variance portfolio. The weights of these two portfolios are shown in the following table: Stock B D F G H Your portfolio 0.12 0.15 0.13 0.10 0.20 0.10 0.12 0.08 M/V portfolio 0.02 0.05 0.25 0.06 0.18 0.10 0.22 0.12 You would like to rebalance your portfolio in order to be closer to the mean variance portfolio. To avoid excessively high transaction costs, you decide to rebalance only three stocks from your portfolio. Let x4 denote the weight of stock i in your rebalanced portfolio. The objective is to minimize the quantity lari -0.02+ |32 -0.051 + |23 -0.25] + ... + |18 0.121, which measures how closely the rebalanced portfolio matches the mean-variance portfolio Formulate this problem as a mixed integer linear program. Note that you will need to introduce new continuous variables in order to linearize the absolute values and new binary variables in order to impose the constraint that only three stocks are traded