Using portfolio optimisation models to enhance decision making and prediction

Abstract

Purpose – The purpose of this paper is to analyse and compare the performances of portfolio optimisation models including Markowitz's mean-variance model (MV model), Konno and Yamazaki's mean-absolute deviation portfolio optimisation model (MAD model), Young's minimax portfolio model and the VaR model. Design/methodology/approach – Historical data on 43 constituent shares listed on the Hong Kong Hang Seng Index (HSI) covering a four-year period are obtained. The paper then tests the performance of each model under different scenarios and against different sets of historical data. Findings – The paper finds that different levels of required annual returns impact on portfolio composition, historical data have a major impact on the determination of portfolio composition and the level of required annual return impacts on how optimisation models perform. Practical implications – The paper posits that with a comprehensive understanding of the performance of each of these performance optimisation models, investors may be able to develop a better understanding of how to adjust investment risk strategies, thus preventing serious losses. Originality/value – There are two major points of value to this paper. In the first place, the paper presents an original review of portfolio optimisation models. Second, using “real” data, the paper utilises five different scenarios to test the performance of each model under different situations.

Does Risk Propensity of Investors Affect the Heuristic Choice of SRI Portfolio Selection?—A Comparison between a Market Portfolio and SRI Portfolio

“…He showed that statistically optimum portfolio can be created. After his marvellous contribution in the field of finance, many researchers started using various statistical measures (Bauder et al, 2020; Bodnar et al, 2021; Chau Li et al, 2012; Cura, 2009; Garcia et al, 2020; Rancovic et al, 2016; Roy, 2016; Siaw et al, 2017) to get optimum portfolio. In the selection of optimum portfolio, few issues are important viz.…”

A binary integer programming (BIP) model for optimal financial turning points detection

“…Several attempts have been done in the literature in different fields of this domain. Li et al (2014), in their work, analyzed and compared the performances of portfolio optimization models, including Markowitz’s mean variance (MV) model, Konno and Yamazaki’s mean absolute deviation (MAD) portfolio optimization model, Young’s minimax portfolio model and the value at risk (VaR) model. Numerical results with 43 shares listed on the Hong Kong Hang Seng Index (HSI) indicated that different levels of required annual returns impact portfolio composition.…”

Modelling exchange-driven fish price dynamics

“…Capturing the salient features of the time-series price data is an important consideration also for investment decisions (Najafabadi et al, 2020) and the characteristics of financial market data in general for other financial modelling endeavours. Basilio et al (2018) for identifying how a multi-criteria analysis may assist investment portfolios formation; Chau et al (2014) for showing the impact of historical data on determination of portfolio composition and the effect of required return on optimisation models' performance; and Sawicki (2009) for finding an explanation regarding the presence of size premium in equity markets using time series data of mutual funds. In Heidari-Fathian and Davari-Ardakani (2019), a portfolio selection problem is tackled in which the portfolio's net present value is maximised and the resource-usage variation is minimised between successive time periods.…”