We propose a semidefinite optimization (SDP) model for the class of minimax two-stage stochastic linear optimization problems with risk aversion. The distribution of second-stage random variables belongs to a set of multivariate distributions with known first and second moments. For the minimax stochastic problem with random objective, we provide a tight SDP formulation. The problem with random right-hand side is NP-hard in general. In a special case, the problem can be solved in polynomial time. Explicit constructions of the worst-case distributions are provided. Applications in a productiontransportation problem and a single facility minimax distance problem are provided to demonstrate our approach. In our experiments, the performance of minimax solutions is close to that of data-driven solutions under the multivariate normal distribution and better under extremal distributions. The minimax solutions thus guarantee to hedge against these worst possible distributions and provide a natural distribution to stress test stochastic optimization problems under distributional ambiguity.
We propose a unified theory that links uncertainty sets in robust optimization to risk measures in portfolio optimization. We illustrate the correspondence between uncertainty sets and some popular risk measures in finance, and show how robust optimization can be used to generalize the concepts of these measures. We also show that by using properly defined uncertainty sets in robust optimization models, one can in fact construct coherent risk measures. Our approach to creating coherent risk measures is easy to apply in practice, and computational experiments suggest that it may lead to superior portfolio performance. Our results have implications for efficient portfolio optimization under different measures of risk.
Expected utility models in portfolio optimization is based on the assumption of complete knowledge of the distribution of random returns. In this paper, we relax this assumption to the knowledge of only the mean, covariance and support information. No additional assumption on the type of distribution such as normality is made. The investor's utility is modeled as a piecewise-linear concave function. We derive exact and approximate optimal trading strategies for a robust or maximin expected utility model, where the investor maximizes his worst case expected utility over a set of ambiguous distributions. The optimal portfolios are identified using a tractable conic programming approach. Using the optimized certainty equivalent (OCE) framework of Ben-Tal and Teboulle [6], we provide connections of our results with robust or ambiguous convex risk measures, in which the investor minimizes his worst case risk under distributional ambiguity. New closed form expressions for the OCE risk measures and optimal portfolios are provided for two and three piece utility functions. Computational experiments indicate that such robust approaches can provide good trading strategies in financial markets.
In this paper, we analyze mixed 0-1 linear programs under objective uncertainty. The mean vector and the second-moment matrix of the nonnegative objective coefficients are assumed to be known, but the exact form of the distribution is unknown. Our main result shows that computing a tight upper bound on the expected value of a mixed 0-1 linear program in maximization form with random objective is a completely positive program. This naturally leads to semidefinite programming relaxations that are solvable in polynomial time but provide weaker bounds. The result can be extended to deal with uncertainty in the moments and more complicated objective functions. Examples from order statistics and project networks highlight the applications of the model. Our belief is that the model will open an interesting direction for future research in discrete and linear optimization under uncertainty.
We address the problem of evaluating the expected optimal objective value of a 0-1 optimization problem under uncertainty in the objective coefficients. The probabilistic model we consider prescribes limited marginal distribution information for the objective coefficients in the form of moments. We show that for a fairly general class of marginal information, a tight upper (lower) bound on the expected optimal objective value of a 0-1 maximization (minimization) problem can be computed in polynomial time if the corresponding deterministic problem is solvable in polynomial time. We provide an efficiently solvable semidefinite programming formulation to compute this tight bound. We also analyze the asymptotic behavior of a general class of combinatorial problems that includes the linear assignment, spanning tree, and traveling salesman problems, under knowledge of complete marginal distributions, with and without independence. We calculate the limiting constants exactly.
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