The mean-absolute deviation portfolio selection problem with interval-valued returns

Abstract

In real-world investments, one may care more about the future earnings than the current earnings of the assets. This paper discusses the uncertain portfolio selection problem where the asset returns are represented by interval data. Since the parameters are interval valued, the gain of returns is interval valued as well. According to the concept of the mean-absolute deviation function, we construct a pair of two-level mathematical programming models to calculate the lower and upper bounds of the investment return of the portfolio selection problem. Using the duality theorem and applying the variable transformation technique, the pair of two-level mathematical programs is transformed into a conventional one-level mathematical program. Solving the pair of mathematical programs produces the interval of the portfolio return of the problem. The calculated results conform to an essential idea in finance and economics that the greater the amount of risk that an investor is willing to take on the greater the potential return.