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Mean-variance model for portfolio optimization problem in the simultaneous presence of random and uncertain returns

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  • Qin, Zhongfeng

Abstract

The determination of security returns will be associated with the validity of the corresponding portfolio selection models. The complexity of real financial market inevitably leads to diversity of types of security returns. For example, they are considered as random variables when available data are enough, or they are considered as uncertain variables when lack of data. This paper is devoted to solving such a hybrid portfolio selection problem in the simultaneous presence of random and uncertain returns. The variances of portfolio returns are first given and proved based on uncertainty theory. Then the corresponding mean-variance models are introduced and the analytical solutions are obtained in the case with no more than two newly listed securities. In the general case, the proposed models can be effectively solved by Matlab and a numerical experiment is illustrated.

Suggested Citation

  • Qin, Zhongfeng, 2015. "Mean-variance model for portfolio optimization problem in the simultaneous presence of random and uncertain returns," European Journal of Operational Research, Elsevier, vol. 245(2), pages 480-488.
    • Handle: RePEc:eee:ejores:v:245:y:2015:i:2:p:480-488
    DOI: 10.1016/j.ejor.2015.03.017
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. Huang, Xiaoxia & Ying, Haiyao, 2013. "Risk index based models for portfolio adjusting problem with returns subject to experts' evaluations," Economic Modelling, Elsevier, vol. 30(C), pages 61-66.
    3. Li, Shengguo & Peng, Jin & Zhang, Bo, 2013. "The uncertain premium principle based on the distortion function," Insurance: Mathematics and Economics, Elsevier, vol. 53(2), pages 317-324.
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