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Portfolio selection subject to experts' judgments

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  • Smimou, K.
  • Bector, C.R.
  • Jacoby, G.
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    Abstract

    Since Markowitz [Markowitz, H. M. (1952). Portfolio selection. The Journal of Finance, 7, 77-91.], mean-variance theory has assumed that risky-asset returns to be random variables. The theory deals with this uncertainty by further assuming that investors hold homogeneous beliefs regarding the probability distribution governing return uncertainty. While the theory deals with return uncertainty, it fails to address measurement imprecision. In his original work, Markowitz recognized the need to combine randomness with heterogeneous expert judgment resulting in such imprecision. The main objective contributions of the paper are (i) to explore the implications of fuzzy return indeterminacy on mean-variance optimal portfolio choice, (ii) to use bid-ask spread as a proxy measure of the indeterminacy or "fuzzy" nature of random returns, and (iii) to introduce a brief, self-contained glimpse of empirical representations to practitioners unfamiliar with the fuzzy modeling field. Exposition, such as this one, is expected to open new collaborations between other branches of fuzzy mathematics and asset-pricing theories.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 17 (2008)
    Issue (Month): 5 (December)
    Pages: 1036-1054

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    Handle: RePEc:eee:finana:v:17:y:2008:i:5:p:1036-1054

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    Web page: http://www.elsevier.com/locate/inca/620166

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    Keywords: Portfolio selection Fuzzy-set theory Mean-variance theory Subjective measures Ambiguity-aversion Experts' judgments;

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    Cited by:
    1. Matus Medo & Chi Ho Yeung & Yi-Cheng Zhang, 2008. "How to quantify the influence of correlations on investment diversification," Papers 0805.3397, arXiv.org, revised Feb 2009.
    2. Alfred Mbairadjim Moussa & Jules Sadefo Kamdem & Michel Terraza, 2012. "Fuzzy risk adjusted performance measures: application to Hedge funds," Working Papers 12-24, LAMETA, Universtiy of Montpellier, revised Sep 2012.
    3. Medo, Matús & Yeung, Chi Ho & Zhang, Yi-Cheng, 2009. "How to quantify the influence of correlations on investment diversification," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 34-39, March.
    4. Rachida Hennani & Michel Terraza, 2012. "Value-at-Risk stressée chaotique d’un portefeuille bancaire," Working Papers 12-23, LAMETA, Universtiy of Montpellier, revised Sep 2012.
    5. Mbairadjim Moussa, A. & Sadefo Kamdem, J. & Shapiro, A.F. & Terraza, M., 2014. "CAPM with fuzzy returns and hypothesis testing," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 40-57.

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