A possibilistic approach to selecting portfolios with highest utility score

  • Authors:

  • Christer Carlsson;Robert Fullér;Péter Majlender

  • Affiliations:

  • IAMSR, Åbo Akademi University, Lemminkäinengatan 14B, DataCity B6734, FIN-20520 Åbo, Finland;Department of OR, Eötvös Loránd University, Kecskeméti ut 10-12, H-1053 Budapest, Hungary;Department of OR, Eötvös Loránd University, Kecskeméti ut 10-12, H-1053 Budapest, Hungary

  • Venue:
  • Fuzzy Sets and Systems - Special issue: Soft decision analysis
  • Year:
  • 2002

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Abstract

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 probability 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.