A more human-like portfolio optimization approach

• DOI: 10.1016/j.ejor.2016.06.018
• Publication Date: 2016-06-27T04:35:08Z
• Authors: Thuener Silva; Plácido Rogério P...; Marcus Poggi
• Keywords: Black–Litterman model

Abstract 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.