Preference Based Portfolio for Private Investors: Discrete Choice Analysis Approach

Marija Kuzmanovic, Dragana Makajic-Nikolic and Nebojsa Nikolic
Additional contact information
Marija Kuzmanovic: Department of Operations Research and Statistics, Faculty of Organizational Sciences, University of Belgrade, 11000 Belgrade, Serbia
Dragana Makajic-Nikolic: Department of Operations Research and Statistics, Faculty of Organizational Sciences, University of Belgrade, 11000 Belgrade, Serbia
Nebojsa Nikolic: Department of Mathematics, Faculty of Organizational Sciences, University of Belgrade, 11000 Belgrade, Serbia

Mathematics, 2019, vol. 8, issue 1, 1-20

Abstract: Behavioral finance literature shows that in addition to Markowitz’s rate of return and risk, private investors consider various other stock features. This paper discusses the problem of determining investors’ preferences for portfolio selection criteria, as well as the problem of optimal portfolio determination from the investors’ point of view. The study primarily focuses on private investors who are interested in one-time investments rather than stock trading. We use a discrete choice analysis and hierarchical Bayes method to measure individual investors’ preferences, and a logit model to determine individual shares of preferences. We treat the share of preferences as the share of certain stocks in an optimal portfolio. The proposed methodology is illustrated by the example of companies whose stocks are traded on the Belgrade Stock Exchange. We measure respondents’ preferences for companies, preferences for return rates, riskiness of stocks, and dividend rates. The results of comparing the performance of the resulting portfolio with the efficient frontier obtained using Markowitz’s portfolio theory indicate its high efficiency, thus validating the proposed approach.

Keywords: behavioral portfolio theory; private investors; preferences; discrete choice analysis; mean–variance efficiency; segments (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7390/8/1/30/pdf (application/pdf)
https://www.mdpi.com/2227-7390/8/1/30/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jmathe:v:8:y:2019:i:1:p:30-:d:301427

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().