Department of Finance
Date of this Version
1996
Document Type
Article
Citation
Journal of Actuarial Practice 4 (1996), pp. 67-90
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 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.
Included in
Accounting Commons, Business Administration, Management, and Operations Commons, Corporate Finance Commons, Finance and Financial Management Commons, Insurance Commons, Management Sciences and Quantitative Methods Commons
Comments
Copyright 1996 Absalom Press