Abstract
ABSTRACTInspired by Maslow’s need hierarchy theory, we construct a new portfolio selection framework using the bi-level optimization technique in which the lower-level need relates to safety (low risk) while the upper-level need is concerned with self-actualization (high payoff). Specially, we consider a bi-level portfolio selection model using variance and conditional value-at-risk associated with the lower-level need and upper-level need, respectively. Accordingly, we propose a procedure to solve this bi-level optimization problem without the normal distribution assumption. Empirical study on the American stock market and U.K. stock market shows that our new model can determine optimal portfolios with moderate diversification. Out of sample performance also confirms that in our framework investors can obtain higher returns in a safe way compared to models in the traditional framework.
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