Optimization of Cardinality Constrained Portfolios with an Hybrid Local Search Algorithm

One of the main advantages of portfolios over single assets is that risk can be diversified without necessarily reducing the expected return — provided the “right” assets are selected and they are assigned the “right” weights. Since in practice investors tend to restrict themselves to a rather small number of different assets, the decision which securities to include or not is a crucial one which turns out to be NP–hard.