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Characterizing compromise solutions for investors with uncertain risk preferences

Author

Listed:
  • Francisco Salas-Molina

    (Hilaturas Ferre, S.A.)

  • Juan A. Rodríguez-Aguilar

    (IIIA-CSIC)

  • David Pla-Santamaria

    (Escuela Politécnica Superior de Alcoy)

Abstract

The optimum portfolio selection for an investor with particular preferences was proven to lie on the normalized efficient frontier between two bounds defined by the Ballestero (J Oper Res Soc 49:998–1000, 1998) bounding theorem. A deeper understanding is possible if the decision-maker is provided with visual and quantitative techniques. Here, we derive useful insights as a way to support investor’s decision-making through: (1) a new theorem to assess balance of solutions; (2) a procedure and a new plot to deal with discrete efficient frontiers and uncertain risk preferences; and (3) two quality metrics useful to predict long-run performance of investors.

Suggested Citation

  • Francisco Salas-Molina & Juan A. Rodríguez-Aguilar & David Pla-Santamaria, 2019. "Characterizing compromise solutions for investors with uncertain risk preferences," Operational Research, Springer, vol. 19(3), pages 661-677, September.
    • Handle: RePEc:spr:operea:v:19:y:2019:i:3:d:10.1007_s12351-017-0309-6
    DOI: 10.1007/s12351-017-0309-6
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    References listed on IDEAS

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    1. Ehrgott, Matthias & Klamroth, Kathrin & Schwehm, Christian, 2004. "An MCDM approach to portfolio optimization," European Journal of Operational Research, Elsevier, vol. 155(3), pages 752-770, June.
    2. Enrique Ballestero & David Pla-Santamaria & Ana Garcia-Bernabeu & Adolfo Hilario, 2015. "Portfolio Selection by Compromise Programming," International Series in Operations Research & Management Science, in: Enrique Ballestero & Blanca Pérez-Gladish & Ana Garcia-Bernabeu (ed.), Socially Responsible Investment, edition 127, chapter 0, pages 177-196, Springer.
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    6. D. Pla-Santamaria & M. Bravo, 2013. "Portfolio optimization based on downside risk: a mean-semivariance efficient frontier from Dow Jones blue chips," Annals of Operations Research, Springer, vol. 205(1), pages 189-201, May.
    7. Panos Xidonas & George Mavrotas & Theodore Krintas & John Psarras & Constantin Zopounidis, 2012. "Multicriteria Portfolio Management," Springer Optimization and Its Applications, in: Multicriteria Portfolio Management, edition 127, chapter 0, pages 5-21, Springer.
    8. Ballestero, Enrique, 2007. "Compromise programming: A utility-based linear-quadratic composite metric from the trade-off between achievement and balanced (non-corner) solutions," European Journal of Operational Research, Elsevier, vol. 182(3), pages 1369-1382, November.
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    Cited by:

    1. Francisco Salas-Molina & Juan Antonio Rodr'iguez Aguilar & Filippo Bistaffa, 2020. "Shared value economics: an axiomatic approach," Papers 2006.00581, arXiv.org.

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