rose.blog

For example, see here and references. From this document:

A seminal application of OR techniques to finance was by Harry Markowitz (1952, 1987) when he specified portfolio theory as a quadratic programming problem (for a survey of this theory, see Board, Sutcliffe and Ziemba, 1999). Participants in financial markets usually wish to construct diversified portfolios because this has the substantial advantage of reducing risk, while leaving expected returns unchanged. The objective function for the portfolio problem is generally specified as minimising risk for a given level of expected return, or maximising expected return for a given level of risk. While returns produce a linear objective function, risk is modelled using the variance, leading to an objective function with quadratic variance and covariance terms.