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Title: Portfolio optimisation models and properties of return distributions
Authors: Roman, D
Darby-Dowman, K
Mitra, G
Keywords: Portfolio selection;Stochastic dominance;Risk aversion;Multi-criteria optimisation;Reference
Issue Date: 2004
Publisher: Brunel University
Citation: The Centre for the Analysis of Risk and Optimisation Modelling Applications (CARISMA), Brunel University; Technical Reports, Sep 2004
Series/Report no.: Technical Reports;CTR/33/04
Abstract: Mean-risk models have been widely used in portfolio optimisation. However, such models may produce portfolios that are dominated with respect to second order stochastic dominance and therefore not optimal for rational and risk-averse investors. This paper considers the problem of constructing a portfolio which is nondominated with respect to second order stochastic dominance and whose return distribution has specified desirable properties. The problem is multi-objective and is transformed into a single objective problem by using the reference point method, in which target levels, known as aspiration points, are specified for the objective function values. A model is proposed in which the aspiration points relate to ordered return outcomes of the portfolio return. The model is extended by additionally specifying reservation points, which act pre-emptively in the optimisation. The theoretical properties of the models are studied. The performance of the models on real data drawn from the Hang Seng index is also investigated.
Appears in Collections:Dept of Mathematics Research Papers
Mathematical Sciences

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