Abstract
Asset allocation in portfolio construction must simultaneously consider market conditions and investors’ specific preferences. Therefore, it is a multi-criteria decision that goes beyond the scope of the two-criteria, mean and variance of the portfolio returns, optimization method that traditionally prevails in the financial literature. This article suggests a procedure that makes integrated asset management possible, based on the Analytic Hierarchy Process combined with a mean variance and goal programming model. We illustrate this procedure with data from Canadian mutual funds over a total period of five years and three months, from September 2002 to November 2007. The results obtained are encouraging, as the portfolios constructed in this manner perform better than the S&P/TSX 60 index, which is the reference portfolio for the Canadian market.
Highlights
We apply the Analytic Hierarchy Process (AHP), combined with a mean variance optimization and goal programming model to allocate assets within a portfolio, considering both market conditions and investors’ preferences.Asset allocation is one of the most deciding tasks that influence portfolio performance
This article suggests a procedure that makes integrated asset management possible, based on the Analytic Hierarchy Process combined with a mean variance and goal programming model
To aid managers in this exercise of decisive importance for portfolio performance, Sharpe [4] suggests an integrated approach to asset allocation that considers both market conditions, and the investor’s goals and wealth
Summary
We apply the Analytic Hierarchy Process (AHP), combined with a mean variance optimization and goal programming model to allocate assets within a portfolio, considering both market conditions and investors’ preferences. Asset allocation is one of the most deciding tasks that influence portfolio performance. Ibboston and Kaplan [3] confirms these results. They observe that asset allocation explains 90% of the variability of mutual funds overtime, 40% of variations between funds, and an average of 100% of a fund’s returns. To aid managers in this exercise of decisive importance for portfolio performance, Sharpe [4] suggests an integrated approach to asset allocation that considers both market conditions, and the investor’s goals and wealth.
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