Multicriteria portfolio management (Q409077)

This book presents an integrated and innovative methodological approach, within the frame of multiple-criteria decision making, for constructing and selecting equity portfolios. The book consists of seven chapters. Chapter 1 (Introduction) is devoted to the motivation of a multiple-criteria decision making approach for constructing and selecting equity portfolios. In Chapter 2 (``Multicriteria portfolio management'') a detailed literature review of the studies in the field of portfolio management within the multiple-criteria decision making framework is presented. Modern portfolio theory assumptions about investors and markets are discussed. The authors set up the problem by analyzing the portfolio management process, stressing the need to model the problem using multicriteria analysis. Then some of the most important multiple-criteria decision making methodological frameworks are summarized. The authors consider multiobjective mathematical programming, goal programming, outranking relation theory, the utility function-based approach, and disaggregation analysis. Chapter 3 (``Stock selection'') addresses security analysis and evaluation. The authors develop a multicriteria methodology for equity selection, exploiting the valuable tool of financial analysis. They present a review of some important studies devoted to investigations the capability that multiple-criteria decision making methods provide regarding the problems of corporate performance evaluation and equity selection. The aim of the proposed methodology is selection of equities that reflect firms characterized by significant financial strength. The firms participating in the evaluation process are categorized in eight classes with respect to their corresponding industry. The ELECTRE III multicriteria method is applied separately in each of these classes. Finally, the partial results are integrated, considering also the major issue of time trends. Each sorting result the methodology provides has a special structure and is based on a specific criteria set (a total of four sets of criteria are constructed). The proposed methodology is applied to data concerning firms whose equities are traded in the American Stock Exchange. A total amount of 259 firms are considered for an application of the proposed methodology. The time period of the study covers three consecutive years (2004--2006). Experts performed qualitative validation of the obtained results. In addition to the qualitative assessment, a quantitative testing of the final results is carried out. Chapter 4 deals with portfolio optimization. The generation of Pareto optimal solutions with the \(\varepsilon\)-constrained method, the so-called AUGMECON is described. The multiobjective mixed-integer linear programming model is formulated in the General Algebric Modeling System platform and solved exploiting the augmented \(\varepsilon\)-constrained method, producing Pareto optimal portfolios. In the next phase, the decision maker participates in the interactive filtering process of the Pareto optimal portfolios that have resulted to choose the most preferred. The proposed methodological approach is applied to data concerning equities traded in the American Stock Exchange. The sample consists of 60 securities covering a broad spectrum of business activities. The study period includes the record of the weekly based closing prices between January 1, 2004 and June 30, 2007. In Chapter 5 (``Portfolio performance evaluation'') the authors emphasize the need for a multicriteria approach to model the problem of portfolio performance evaluation. The aim of the proposed approach is the evaluation, and finally the selection, of equity portfolios. The set of portfolios under evaluation is determined and the criterion set constructed. The criterion set developed consisted of specialized measures such as risk-adjusted performance ratios of Sharpe, Jensen, and Treynor, the \(M^2\) and \(T^2\) measures, the portfolio's value at risk, and the conventional measures of mean and standard deviation of capital return. The resistance-to-change weighting system is chosen for the formulation of three investment profiles: conservative, balanced and aggressive. The technical parameters (preference and indifference thresholds) of the ELECTRE III multicriteria decision aid ranking method, which was employed for the portfolio evaluation process, are determined. Three hypothetical equity portfolios (one for each investment profile) are utilized as benchmark portfolios in the evaluation. At the final stage of the proposed approach, the sensitivity of the obtained results is tested. The appropriate portfolio is finally selected by adjusting the betas of the top-ranked alternatives to the investment profile of the potential decision makers and their attitudes towards risk. Again, the proposed methodology is applied to the data concerning portfolios whose equities were traded in the American Stock Exchange from above. In Chapter 6 (``Applied portfolio management'') the authors present the fundamental elements that drive today's professional asset management world. The basic tools are described, such as strategic market evaluation, focus group definition, relative value analysis, technical analysis, various behaviour variables, and the definition of exceptional targets. Finally, techniques are introduced that help evaluate market conditions. The discussions focus in macroeconomic and microeconomic models, corporate actions, risk analysis and alternative options, rules for target price definition, and supernormal or nonconstant expected growth issues. Chapter 7 presents conclusions.