An Approach to Forming and Managing a Portfolio of Financial Securities by Small and Medium Price-Taking Traders in a Stock Exchange
The paper discusses a new approach to developing tools for quantitatively analyzing the financial behavior of small and medium price-taking traders each possessing abilities to predict share price values for a set of financial securities traded in a stock exchange. Tools for forming and managing a trader’s portfolio of securities from this set are proposed. Particularly, it is shown that when the trader can treat share price values from the portfolio as random variables with known (to her) distributions, an optimal portfolio composition is found by solving a linear programming problem. Otherwise, this optimal composition is found as the trader’s equilibrium strategy in an antagonistic two-person game with the stock exchange being the other player. In this game on polyhedra of disjoint player strategies, described by systems of linear equations and inequalities of a balance kind, calculating saddle points is reduced to solving linear programming problems forming a dual pair.