Title

A chance-constrained portfolio selection model with random-rough variables

Document Type

Article

Publication Date

6-14-2017

DOI

https://doi.org/10.1007/s00521-017-3014-8

Abstract

Traditional portfolio selection (PS) models are based on the restrictive assumption that the investors have precise information necessary for decision-making. However, the information available in the financial markets is often uncertain. This uncertainty is primarily the result of unquantifiable, incomplete, imprecise, or vague information. The uncertainty associated with the returns in PS problems can be addressed using random-rough (Ra-Ro) variables. We propose a new PS model where the returns are stochastic variables with rough information. More precisely, we formulate a Ra-Ro mathematical programming model where the returns are represented by Ra-Ro variables and the expected future total return maximized against a given fractile probability level. The resulting change-constrained (CC) formulation of the PS optimization problem is a non-linear programming problem. The proposed solution method transforms the CC model in an equivalent deterministic quadratic programming problem using interval parameters based on optimistic and pessimistic trust levels. As an application of the proposed method and to show its flexibility, we consider a probability maximizing version of the PS problem where the goal is to maximize the probability that the total return is higher than a given reference value. Finally, a numerical example is provided to further elucidate how the solution method works.

Language

English

Comments

Tavana, M., Khanjani Shiraz, R. and Di Caprio, D. (2019) ‘A Chance-Constrained Portfolio Selection Model with Random-Rough Variables,’ Neural Computing and Applications, Vol. 31, No. S2, pp. 931-945.

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