Apply Genetic Algorithm to Explore Fund of Funds on Efficient Frontier and Product Design

This paper employs genetic algorithm (GA ) to construct the efficient frontier for the fund of funds (FoF) based on The Administration Acts of Security Investment and Trust Fund in Taiwan. The model proposed in this paper can be used to examine the effects of efficient frontier on different FoF and to verify the profit prediction power of alternative FoF constructed by GA. Our conclusions show that the current FoF based on The Administration Act of Security Investment and Trust Fund in Taiwan exhibits less efficiency. In particular, based on the optimal asset allocation principles of profit maximization and risk minimization, this paper employs three market indexes and fund's asset net value as benchmark indexes for the constructions of FoF by applying GA. Compared to the performance of Taiwan Stock Exchange Corporation (TSEC) weighted price index, the average performance of domestic FoF and stock funds within the same period, the performance of the FoF constructed in this paper is more efficient across the test sample. In addition, this paper also shows that a FoF combined with the concepts of profit maximization and risk minimization as well as the order of Sharp index will offer a better and stable prediction power.