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Suitable-portfolio investors, nondominated frontier sensitivity, and the effect of multiple objectives on standard portfolio selection

Ralph Steuer (), Yue Qi and Markus Hirschberger

Annals of Operations Research, 2007, vol. 152, issue 1, 297-317

Abstract: In standard portfolio theory, an investor is typically taken as having one stochastic objective, to maximize the random variable of portfolio return. But in this paper, we focus on investors whose purpose is to build, more broadly, a “suitable portfolio” taking additional concerns into account. Such investors would have additional stochastic and deterministic objectives that might include liquidity, dividends, number of securities in a portfolio, social responsibility, and so forth. To accommodate such investors, we develop a multiple criteria portfolio selection formulation, corroborate its appropriateness by examining the sensitivity of the nondominated frontier to various factors, and observe the conversion of the nondominated frontier to a nondominated surface. Furthermore, multiple criteria enable us to provide an explanation as to why the “market portfolio,” so often found deep below the nondominated frontier, is roughly where one would expect it to be with multiple criteria. After commenting on solvability issues, the paper concludes with the idea that what is the “modern portfolio theory” of today might well be interpreted as a projection onto two-space of a real multiple criteria portfolio selection problem from higher dimensional space. Copyright Springer Science+Business Media, LLC 2007

Keywords: Multiple criteria portfolio selection; Multi-attribute portfolio selection; Stochastic objectives; Suitable-portfolio investors; Market portfolio; Nondominated surfaces; Nondominated frontier sensitivity (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/s10479-006-0137-1

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