An Alternating Method for Cardinality-Constrained Optimization: A Computational Study for the Best Subset Selection and Sparse Portfolio Problems

Abstract

Cardinality-constrained optimization problems are notoriously hard to solve in both theory and practice. However, as famous examples, such as the sparse portfolio optimization and best subset selection problems, show, this class is extremely important in real-world applications. In this paper, we apply a penalty alternating direction method to these problems. The key idea is to split the problem along its discrete-continuous structure to obtain two subproblems that are much easier to solve than the original problem. In addition, the coupling between these subproblems is achieved via a classic penalty framework. The method can be seen as a primal heuristic for which convergence results are readily available from the literature. In our extensive computational study, we first show that the method is competitive to a commercial mixed-integer program solver for the portfolio optimization problem. On these instances, we also test a variant of our approach that uses a perspective reformulation of the problem. Regarding the best subset selection problem, it turns out that our method significantly outperforms commercial solvers and it is at least competitive to state-of-the-art methods from the literature. History: Accepted by Andrea Lodi, Area Editor for Design & Analysis of Algorithms–Discrete. Funding: The first author thanks the Deutsche Forschungsgemeinschaft (DFG) for its support within “Algorithmic Optimization” [Grant RTG 2126]. The third author thanks the DFG for its support within project A05 and B08 in the “Sonderforschungsbereich/Transregio 154 Mathematical Modeling, Simulation and Optimization using the Example of Gas Networks.” Supplemental Material: The supplementary material is available at https://doi.org/10.1287/ijoc.2022.1211 .