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Value of information in portfolio selection, with a Taiwan stock market application illustration

Author

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  • Kao, Chiang
  • Steuer, Ralph E.

Abstract

Despite many proposed alternatives, the predominant model in portfolio selection is still mean–variance. However, the main weakness of the mean–variance model is in the specification of the expected returns of the individual securities involved. If this process is not accurate, the allocations of capital to the different securities will in almost all certainty be incorrect. If, however, this process can be made accurate, then correct allocations can be made, and the additional expected return following from this is the value of information. This paper thus proposes a methodology to calculate the value of information. A related idea of a level of disappointment is also shown. How value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a Taiwan Stock Exchange illustrative application in which the value of information appears to be substantial. Heavy use is made of parametric quadratic programming to keep computation times down for the methodology.

Suggested Citation

  • Kao, Chiang & Steuer, Ralph E., 2016. "Value of information in portfolio selection, with a Taiwan stock market application illustration," European Journal of Operational Research, Elsevier, vol. 253(2), pages 418-427.
    • Handle: RePEc:eee:ejores:v:253:y:2016:i:2:p:418-427
    DOI: 10.1016/j.ejor.2016.02.011
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    Cited by:

    1. Borgonovo, Emanuele & Hazen, Gordon B. & Jose, Victor Richmond R. & Plischke, Elmar, 2021. "Probabilistic sensitivity measures as information value," European Journal of Operational Research, Elsevier, vol. 289(2), pages 595-610.
    2. Clara Calvo & Carlos Ivorra & Vicente Liern & Blanca Pérez-Gladish, 2021. "Grading Investment Diversification Options in Presence of Non-Historical Financial Information," Mathematics, MDPI, vol. 9(6), pages 1-11, March.

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