Optimal Portfolio Selection of Assets with Transaction Costs and No Short Sales

In the real financial markets, any movement of money between assets incurs a transaction cost proportional to the size of the transaction, paid from the bank account. In most cases, investors or portfolio managers usually start with an existing portfolio and make decisions of adjustment, probably, due to the changes of information about these securities. Since the revision entails both purchases and sales of securities that both incur transaction costs, the transaction cost is a V-shaped function of the difference between a new portfolio and the existing one. Obviously, the transaction cost has a direct impact on one’s investment performance, So, transaction costs have rightly become an important factor of concern and frustration for investors. The net return of a portfolio of securities should be evaluated by taking the costs into consideration. Arnott and Wagner (1990) observed that ignoring the transaction costs might result in inefficient portfolios. The experimental analysis done by Yoshimoto (1996) also verifies this fact.