Practical Financial Optimization: Decision Making for Financial Engineers

Preface

The purpose of the present study is not, as it is in other inquiries, the attainment of theoretical knowledge: we are not conducting this inquiry in order to know what virtue is, but in order to become good, else there would be no advantage in studying it. For that reason, it becomes necessary to examine the problem of actions, and to ask how they are to be performed. For the actions determine what kind of characteristics are developed.

Aristotle, Nichomachean Ethics

Optimization is pervasive in finance. More than half a century has passed since quadratic programming was introduced in portfolio selection by Markowitz (1952), and during this period optimization techniques evolved from a theoretical tool of positive analysis to a practical tool for normative analysis. Optimization models are today at the core of decision support systems for financial engineers.

While optimization as a normative model was proposed as early as 1952, it was not until the 1980s that we saw the proliferation of optimization models in financial decision making. The catalysts for this development have been the emergence of financial engineering and the demands for enterprise-wide risk management. The need to integrate multiple interrelated risk factors of the global enterprise brought to the fore the power of optimization models. At the same time, the development of large-scale numerical optimization techniques, advances in optimization models for planning under uncertainty, and the availability ...