Portfolio Optimization of Commercial Banks- An Application of Genetic Algorithm

Abstract

Portfolio optimization, in case of finance, is the trade- off between risk and return to maximize profit or return from the portfolio. Financial regulations are country specific and it depends upon the economic conditions prevailing in the country. The portfolio of a commercial bank can be constrained by regulatory prescription of exposure limits, risk weights and returns from each category of assets. Hence, optimization of return, in case of the loan portfolio, presents a challenging problem due to its large set of local extremes. In this context, Genetic Algorithm is used as a possible solution to optimize the risk-return trade-off and achieve an ideal solution for portfolio optimization.

Keywords: Portfolio Management, Risk-Return Trade Off, Commercial Banking