Lijia Guo and Zhen Huang
Abstract
The mean-variance method has been one of the popular methods used by most financial institutions in making the decision of asset allocation since the 1950s. This paper presents an alternative method for asset allocation. Instead of minimizing risk for a given expected return or maximizing expected return for a fixed level of risk, our approach considers {\it simultaneously} maximizing the rate of return of portfolio, minimizing the risk of obtaining lower return, and maximizing the possibility of reaching higher return. By using a triangular possibilistic distribution to describe the uncertainty of the return, we introduce a possibilistic linear programming model which we solve by a multiple objective linear programming technique with two control constraints. We present a solution algorithm that provides maximal flexibility for decision makers to effectively balance the portfolio's return and risk. Numerical examples show the efficiency of the algorithm.
Key words and phrases: Mean-variance method; possibility distribution; multiple-objective, fuzzy sets
Lijia Guo