Credibilistic Mean-Absolute Deviation Model

Abstract

Mean-absolute deviation model was first proposed by Konno and Yamazaki (1991) for stochastic portfolio optimization by using absolute deviation risk function to replace variance. It removes most of the difficulties associated with Markowitz’s mean-variance model. This model can cope with large-scale portfolio optimization problem because it leads to a linear programming. Furthermore, the authors showed that this model gave essentially the same results as the mean-variance model if all the returns are normally distributed random variables. Since then, absolute deviation has been accepted as a risk measure. As extensions, Konno et al. (1993) presented mean-absolute deviation-skewness model for the case when the distributions of returns are asymmetrical around their means, and Yu et al. (2010) presented a multiperiod portfolio optimization model with risk control for absolute deviation.