Abstract
Traditional portfolio selection models mainly obtain the optimized portfolio ratio by focusing on the prices of financial products. However, investors’ multiple preferences and risk appetites are also significant factors that should be taken into account. In consideration of these two factors simultaneously, we propose a double-hierarchy model in this paper. Specifically, the first hierarchy quantifies investors’ risk appetite based on a historical simulation method and probabilistic preference theory. This hierarchy can be utilized to describe investors’ variable risk appetites and ensure the obtained investment ratios meet investors’ immediate risk requirements. Then, using the cross-efficiency evaluation principle, the optimal investment ratios can be derived by fusing investors’ multiple preferences and risk appetites in the second hierarchy. Lastly, an illustrative example about evaluating the 10 largest capitalized stocks on the Shenzhen Stock Exchange is given to verify the feasibility and effectiveness of our newly proposed model. We make the theoretical contribution to improve the traditional portfolio selection model, especially considering investors’ subjective preferences and risk appetite. Moreover, the proposed model can be practical for assisting investors with their investment strategies in real life.
Highlights
Portfolio selection has been broadly discussed in the field of economics over years
Even though people would mainly concern about the expected returns, some key elements should be taken into consideration, such as investors’ risk appetites and their subjective preference. ese two key elements are variable for different investors
How to quantitate investors’ dynamic risk appetite and multiple preferences is the issue that this paper addresses as well
Summary
Portfolio selection has been broadly discussed in the field of economics over years. As an effective tool to diversify risks and increase profits, how to optimize the portfolio has become a hot issue for investors. Rational investors would make investment decisions merely based on a single preference such as financial product price Instead, they tend to consider multiple relative preferences of investment objectives with dynamic risk appetites. From the perspective of preference analysis, different scholars have carried out research studies on investment portfolio preference selection issues, preference evaluation, and preference effects. The previous studies mainly focus on a single preference of the portfolio, such as financial product price, but less attention is paid to investors’ variable risk appetites. Erefore, we quantify the variable risk appetites and introduce them into a multipreference portfolio selection model to carry out further empirical investigation. Determine the research topic: Portfolio selection with respect to probabilistic preferences in variable risk appetites
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