Multicriteria asset allocation in practice

In this paper, we consider the strategic asset allocation of an insurance company. This task can be seen as a special case of portfolio optimization. In the 1950s, Markowitz proposed to formulate portfolio optimization as a bicriteria optimization problem considering risk and return as objectives. However, recent developments in the field of insurance require four and more objectives to be considered, among them the so-called solvency ratio that stems from the Solvency II directive of the European Union issued in 2009. Moreover, the distance to the current portfolio plays an important role. While the literature on portfolio optimization with three objectives is already scarce, applications in the financial context with four and more objectives have not yet been solved so far by multi-objective approaches based on scalarizations. However, recent algorithmic improvements in the field of exact multi-objective methods allow the incorporation of many objectives and the generation of well-spread representations within few iterations. We describe the implementation of such an algorithm for a strategic asset allocation with four objective functions and demonstrate its usefulness for the practitioner. Our approach is in operative use in a German insurance company. Our partners report a significant improvement in their decision-making process since, due to the proper integration of the new objectives, the software proposes portfolios of much better quality than before within short running time.

A Simple View on the Interval and Fuzzy Portfolio Selection Problems

In this paper, first we show that the variance used in the Markowitz’s mean-variance model for the portfolio selection with its numerous modifications often does not properly present the risk of portfolio. Therefore, we propose another treating of portfolio risk as the measure of possibility to earn unacceptable low profits of portfolio and a simple mathematical formalization of this measure. In a similar way, we treat the criterion of portfolio’s return maximization as the measure of possibility to get a maximal profit. As the result, we formulate the portfolio selection problem as a bicriteria optimization task. Then, we study the properties of the developed approach using critical examples of portfolios with interval and fuzzy valued returns. The α-cuts representation of fuzzy returns was used. To validate the proposed method, we compare the results we got using it with those obtained with the use of fuzzy versions of seven widely reputed methods for portfolio selection. As in our approach we deal with the bicriteria task, the three most popular methods for local criteria aggregation are compared using the known example of fuzzy portfolio consist of five assets. It is shown that the results we got using our approach to the interval and fuzzy portfolio selection reflect better the essence of this task than those obtained by widely reputed traditional methods for portfolio selection in the fuzzy setting.

Hesitant Fuzzy MADM Approach in Optimal Selection of Investment Projects

The article proposes a multi-attribute decision making (MADM) approach, which is applied to the problem of optimal selection of the investment projects. This novel methodology comprises two stages. First, it makes ranking of projects based on TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) method presented in hesitant fuzzy environment. We consider the case when the information on the weights of the attributes is completely unknown. The identification of the weights of the attributes is made in the context of hesitant fuzzy sets and is based on the De Luca-Termini information entropy. The ranking of alternatives is made in accordance with the proximity of their distance to the positive and negative ideal solutions. Second stage of the methodology allows making the most profitable investment in several projects simultaneously. The decision on an optimal distribution of allocated investments among the selected projects is provided using the method developed by the authors for a possibilistic bicriteria optimization problem. An investment example is given to illustrate the application of the proposed approach.