A possibilistic approach to selecting portfolios with highest utility score

The mean-variance methodology for the portfolio selection problem, originally proposed by Markowitz, has been one of the most important research fields in modern finance. In this paper we will assume that (i) each investor can assign a welfare, or utility, score to competing investment portfolios based on the expected return and risk of the portfolios; and (ii) the rates of return on securities are modelled by possibility distributions rather than probablity distributions. We will present an algorithm of complexity o(n3 ) for finding an exact optimal solution (in the sense of utility scores) to the n-asset portfolio selection problem under possibility distributions. 1 A utility function for ranking portfolios The mean-variance methodology for the portfolio selection problem, originally proposed by Markowitz [4], has been one of the most important research fields in modern finance theory [7]. The key principle of the mean-variance model is to use the expected return of a portfolio as t...

• Type: Journal
• Year: 2002
• Where: FSS
• Authors: Christer Carlsson, Robert Fullér, Péter Majlender
• Keywords: Expected Return, FSS 2002, Important Research Fields, Portfolio Selection Problem