Some Problems in Applying the Continuous Portfolio Selection Model to the Discrete Capital Budgeting Problem

Baum, Sanford; Carlson, Robert; Jucker, James V.

doi:10.2307/2330390

Cited by 10 publications

(7 citation statements)

References 8 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Quadratic programming solutions are typically continuous, while futures contracts are indivisible, discrete investments. The use of rounded-off continuous solutions as approximations of true discrete solutions may be suboptimal, and the implications of this potential problem have been noted by Heifner 1966;Baum, Carlson and Jucker 1978;Robison and Barry 1980;Rausser 1980;and Anderson and Danthine 1981. To overcome this problem, some type of discrete nonlinear programming routine must be used, and one such method is the discrete modified complex (DMC) algorithm developed by Fox and Liebman. The DMC algorithm can handle continuous variables in two ways, either by treating them as continuous variables directly or by a continuous approximation which treats them as discrete but with a small interval, or pseudoincrement.…”

Section: Previous Studiesmentioning

confidence: 99%

A portfolio approach to optimal hedging for a commercial cattle feedlot

Leuthold¹,

Peterson²

1987

Journal of Futures Markets

View full text Add to dashboard Cite

he cattle feeding industry in the United States has been characterized in recent T years by wide swings in the prices of the major inputs-feeder cattle and feed grains-and the final product-fed cattle. Hedging with futures contracts is one technique that cattle feeders can use to stabilize prices and incomes, and it has become increasingly important as a risk management tool during the past decade.A number of strategies for placing hedges on fed cattle (Farris 1972; Purcell, Hague and Holland 1972;Menzie and Archer 1972;Leuthold 1975;McCoy and Price 1975;Erickson 1978) and on combinations of feeder cattle, feed grain, and fed cattle (Shafer, Griffin and Johnston 1978;Leuthold and Mokler 1979;Caldwell, Copeland and Hawkins 1982) have been published. These studies used fully-hedged and unhedged positions and did not permit the use of partial hedges. As a result, they were unable to determine how much of the cash position should be hedged and how many futures contracts would be required to achieve some desired level of risk reduction. This study treats the optimal hedging problem as a special case of the general portfolio problem. Previous studies using this approach have been unable to deal with multiple simultaneous short and long positions. They also have failed to produce optimal hedging solutions expressed in multiples of full contracts, rather than fractional contracts or percentages of the corresponding cash market positions. This article develops a general optimal hedging technique which eliminates these shortcomings, and then applies it over an extended period of time to a hypothetical cattle feeding problem. In an evaluation of some common assumptions about proper

show abstract

Section: Previous Studiesmentioning

confidence: 99%

A portfolio approach to optimal hedging for a commercial cattle feedlot

Leuthold¹,

Peterson²

1987

Journal of Futures Markets

View full text Add to dashboard Cite

show abstract

“…University of Southern California. Both Weingartner [7] and Mao [3] suggest that the solution of (M) will Jucker [1] showed that any efficient point which is not located at a corner point of the upper boundary of the convex hull of the complete set of efficient points may be missed. They showed that such points will be missed unless the utility function describing the decision maker's preferences is a linear function of the mean and variance of return.…”

Section: The Traditional Markowitz Approachmentioning

confidence: 99%

“…Baum, Carlson, and Jucker [1] show that Mao [3], Table 1. They both have the same variance, but solution 4 has the larger return.…”

Section: The Modified Approachmentioning

confidence: 99%

“…This paper shows that the integer efficient frontier for capital budgeting problems can be computed using a modified Markowitz approach. It is shown that if the quadratic integer capital budgeting problem is reformulated as a parametric programming problem on the right-hand side of the return constraint, the problem indicated by Baum, Carlson, and Jucker [1] is eliminated. The traditional Markowitz approach is to formulate the problem as an objective function parametric programming problem.…”

Section: Introductionmentioning

confidence: 99%

“…The traditional Markowitz approach is to formulate the problem as an objective function parametric programming problem. Baum, Carlson, and Jucker [1] show that the traditional approach cannot generally be applied to solve quadratic zero-one integer capital budgeting problems. They show that this approach may fail to identify some efficient points.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Finding the Integer Efficient Frontier for Quadratic Capital Budgeting Problems

McBride¹

1981

The Journal of Financial and Quantitative Analysis

View full text Add to dashboard Cite

A portfolio approach to optimal hedging for a commercial cattle feedlot

Peterson

Leuthold

1987

Journal of Futures Markets

View full text Add to dashboard Cite

he cattle feeding industry in the United States has been characterized in recent T years by wide swings in the prices of the major inputs-feeder cattle and feed grains-and the final product-fed cattle. Hedging with futures contracts is one technique that cattle feeders can use to stabilize prices and incomes, and it has become increasingly important as a risk management tool during the past decade.A number of strategies for placing hedges on fed cattle (Farris 1972;Purcell, Hague and Holland 1972;Menzie and Archer 1972;Leuthold 1975;McCoy and Price 1975;Erickson 1978) and on combinations of feeder cattle, feed grain, and fed cattle (Shafer, Griffin and Johnston 1978;Leuthold and Mokler 1979;Caldwell, Copeland and Hawkins 1982) have been published. These studies used fully-hedged and unhedged positions and did not permit the use of partial hedges. As a result, they were unable to determine how much of the cash position should be hedged and how many futures contracts would be required to achieve some desired level of risk reduction.This study treats the optimal hedging problem as a special case of the general portfolio problem. Previous studies using this approach have been unable to deal with multiple simultaneous short and long positions. They also have failed to produce optimal hedging solutions expressed in multiples of full contracts, rather than fractional contracts or percentages of the corresponding cash market positions. This article develops a general optimal hedging technique which eliminates these shortcomings, and then applies it over an extended period of time to a hypothetical cattle feeding problem. In an evaluation of some common assumptions about proper Paul E. Peterson is Marketing Manager, Chicago Board ofTrade, Chicago, I1 linois .

show abstract

Some Problems in Applying the Continuous Portfolio Selection Model to the Discrete Capital Budgeting Problem

Cited by 10 publications

References 8 publications

A portfolio approach to optimal hedging for a commercial cattle feedlot

A portfolio approach to optimal hedging for a commercial cattle feedlot

Finding the Integer Efficient Frontier for Quadratic Capital Budgeting Problems

A portfolio approach to optimal hedging for a commercial cattle feedlot

Contact Info

Product

Resources

About