Abstract
Portfolio optimization generally involves maximizing the expected return of a portfolio while minimizing its risk. However, when considering these 2 conflicting objectives in decision-making contexts, an efficient approach is required to evaluate the solution in the set of efficient frontiers/Pareto optimal solutions. Selecting and managing an investment portfolio are critical for investors. This study proposes an integrated method for portfolio optimization that involves decisions on stock screening, stock selection, and capital allocation. The initial step involves examining the financial data of investment targets. The portfolio is then selected according to the firms’ relative efficiency by using a data envelopment analysis (DEA) model. To determine the allocation of capital to each stock in the constructed portfolio, a multi-objective decision-making (MODM) model is developed. The integrated DEA-MODM approach is applied to Taiwan’s financial market and compared with several benchmarking mutual funds for empirical testing. This comparative study shows that the proposed approach outperforms the Taiwan Excel 50 ETF and 3 other benchmarking mutual funds in numerous quarters of the testing period regarding return rates and Sharpe ratios. Therefore, the proposed integrated DEA-MODM approach can be useful to both investors and researchers.
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