A more human-like portfolio optimization approach

•We propose a new method for constructing a portfolio aligned with the investor’s profile and personal perspective.•We propose a new way to create Black–Litterman views.•Our method is more qualitative than other Black–Litterman variants and helps to quantify the subjective views.•We analyze the sens...

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Bibliographic Details
Published inEuropean journal of operational research Vol. 256; no. 1; pp. 252 - 260
Main Authors Silva, Thuener, Pinheiro, Plácido Rogério, Poggi, Marcus
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.01.2017
Elsevier Sequoia S.A
Subjects
Asset allocation
Black–Litterman
Decision analysis
Decision support systems
Estimating techniques
Investment policy
Portfolio investments
Portfolio optimization
Rates of return
Risk management
Stocks
Studies
Verbal Decision Analysis
Brazil
Decision support systems
Portfolio optimization
Black–Litterman
Verbal Decision Analysis
Asset allocation
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Summary:•We propose a new method for constructing a portfolio aligned with the investor’s profile and personal perspective.•We propose a new way to create Black–Litterman views.•Our method is more qualitative than other Black–Litterman variants and helps to quantify the subjective views.•We analyze the sensitivity of the method through practical experiments. Black and Litterman proposed an improvement to the Markowitz portfolio optimization model. They suggested the construction of views to represent investor’s opinion about the future of stocks’ returns. However, conceiving these views can be quite confusing. It requires the investor to quantify several subjective parameters. In this article, we propose a new way of creating these views using Verbal Decision Analysis. Questionnaires were designed with the intent of making it easier for investors to express their vision about stocks. Following the ZAPROS methodology, the investor answers sets of questions allowing to determine a Formal Index of Quality (FIQ). The views are then derived from the resulting FIQ. Our approach was implemented and tested on data from the Brazilian Stocks. It allows investors to create a personal risk-return balanced portfolio without the help of an expert. The experiments show that the proposed method mitigates the impact of poor view estimation. Also, one must notice that the method is qualitative and its aim is to create a more efficient portfolio considering the investor’s vision.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2016.06.018