Portfolio Preferences Research Articles

Domain-dependent diversification: The influence of gain–loss domain on correlation choice

Despite compelling evidence of widespread gain–loss-domain-dependent behavior, research on domain-dependent diversification is scarce. We recruited 251 experienced US retail investors to participate in a controlled experiment with the task to select portfolios that differ in asset correlation and, hence, diversification benefits in both the gain and the loss domain. We find evidence of domain-dependent diversification, both unconditional and conditional on benchmark portfolio preferences. Consistent with a loss-attention hypothesis, diversification errors are not observed in the loss domain but are clearly present in the gain domain (with much lower diversification relative to the benchmark).

Domestic Savings and International Capital Flows in the EU

This paper uses new statistical estimates to test for effects of economic integration in Europe on international capital mobility. In a world of perfect capital mobility, one should experience little or not statistically significant relationship between the amount of domestic savings and domestic investment. Alternatively, under less-than perfect capital international mobility, diverse portfolio preferences and country-specific transactions costs would create impediments for long-term capital flows. This would result in direct connection between any changes (increases) in domestic savings and domestic investment. According to empirical results of a similar empirical study by Feldstein and Horioka (1980) for developed countries (including some of current EU members included in this investigation), there were portfolio preferences and institutional rigidities, which resulted in almost equal corresponding differences in domestic investment rates driven by domestic savings rates among major industrial countries.
 The current study tests for capital mobility in the EU Member States (2010-2020) discussing compatibility of findings with previous evidence found in the literature (Feldstein and Horioka 1980). It also addresses the optimal national savings policy, tax incidence and concludes on capital formation in the EU.

Determining The Optimal Portfolio Markowitz Model on Moving Stock Prices Using Brown Motion Geometry

Stock price movements that fluctuate and follow a stochastic process will make it difficult for investors to start investing. For that, we need a stochastic mathematical model. The Brownian geometry motion model is one of the stochastic models that can be used to display the condition of a stock's price movement. Investment is related to the rate of return (return) and the risk obtained. The higher the rate of return obtained, the higher the risk obtained. Therefore, a portfolio calculation is needed, one of which is using the Markowitz model. The Markowitz model can be used to determine the optimal portfolio. The purpose of this study is to model stock prices and form an optimal portfolio. The stock price data used are BBRI, TLKM, and ADRO for the period from 1 July 2021 to 31 August 2022. The results obtained from this study are that there are three portfolio preferences. If investors like high risk to get high returns, then the combined allocation of funds for BBRI, TLKM and ADRO shares is 10.51%, 42.05% and 47.44% respectively. If investors do not like high risk but still want to get a return that is balanced with risk, then the combination of fund allocation for shares of BBRI, TLKM and ADRO is 22.62%, 46.63% and 30.75%, respectively. If the investor chooses minimum risk, the combined allocation of BBRI, TLKM and ADRO shares is 34.73%, 51.21% and 14.06%, respectively.

A ranking approach for robust portfolio decision analysis based on multilinear portfolio utility functions and incomplete preference information

Uncertainties are often present in typical portfolio decision analysis (PDA), and it is prudent to conduct a robust PDA to identify project portfolios that perform reasonably well across the entire range of uncertain parameter values. Previous research on robust PDA and applications has almost entirely relied on additive portfolio preference functions, with little research on robustness under multilinear portfolio utility functions (PUFs). A ranking approach for robust PDA is proposed based on multilinear PUFs, incomplete preference information, and the algorithm for accelerating stochastic multicriteria acceptability analysis (SMAA). First, the initial set of portfolios is screened through various constraints to produce a smaller set of desirable portfolios. Second, several types of incomplete preference information are thought to be elicited with regard to multilinear PUFs, including preference information on coefficients, portfolios, and uncertainties on preference elicitation techniques. Third, the SMAA decomposition algorithm is implemented as a ranking approach to perform robust PDA on the basis of multilinear PUFs, incomplete preference information, and potentially numerous portfolios in the set of desirable portfolios. Finally, the approach is applied to a case to validate its effectiveness, and comparisons among additive, multiplicative, and multilinear PUFs in terms of decision recommendations are performed.

Prior partnering experience and preferred alliance partner diversity of small firms

PurposeThis study investigates how small firms develop preferences for varying levels of alliance partner diversity by applying a behavioral perspective.Design/methodology/approachData were collected via an original survey administered by the Swedish National Bureau of Statistics (SCB) of 1,026 Swedish firms with 50 employees or less. Hypotheses were tested by specifying a series of fractional response regressions.FindingsThe results show a U-shaped relationship between experienced and preferred alliance partner diversity in small firms and further show moderating effects of firm age, prior growth and environmental dynamism. The findings suggest that preferences towards diverse alliance portfolios in small firms may arise, not only from well-informed deliberate strategic thinking based on prior experience, but also as a consequence of cognitive bias.Practical implicationsThe findings suggest that (1) small firms considering a wide variety of alliance partners should carefully investigate whether they are, in fact, capable of mastering a highly diverse alliance portfolio or if they are overconfident novices. (2) Holders of homogenous alliance portfolios should recurringly investigate whether homogeneity is due to informed strategy or inertia.Originality/valueThis study contributes to the literature on alliance partner diversity and behavioral alliance portfolio configuration by shedding light on the learning mechanisms that shape alliance portfolio strategies of small firms by explicating the complexity of how different experience levels of partner variety affect current alliance portfolio preferences.

Applications of Big Data Analytics in Investment Management

Big data has emerged as an important resource for generating wealth in society along with capital and labour, as data analytics generates valuable information and provides critical insights to gain competitive advantage. In Investment management, access to information is vital. As analytics causes information asymmetry among those who use it and others, it has become a key result area in the domain.IM involves multi-criteria decision-making necessitating managers to acquire core capability in analytics. The field of IM is passing through rapid changes, with varying customer preferences, advancing technologies, diminishing margins, acute competition, in the midst of increase in compliances. Cock-pit monitoring and goal-based portfolio preferences by some large customers have complicated IM. The paper explores the rationale for implementing big data analytics and identifies evolving tools and technologies that are applicable in the domain. The paper also highlights few emerging areas of research in the field using both bibliometric analysis and systemic literature review techniques.

Equate Goals and Risks in the Convenience of Investing

During this uncertain pandemic situation, the number of investors is increasing all over the world. Nevertheless, this trend does not indicate the right investment decision, especially for young investors who have specific characteristics. Risk-based portfolio preference is expected to be a bridge or mediation that can contribute to investment decisions caused by goal-based investing. The objective of this study is to analyze the interrelation of goal-based investing, risk-based portfolio preference, and investment decision among young investors in Rumah Saham Indonesia/RSI (Indonesian Stock House). The population of this research was 935 young individual investors registered with RSI. Using a proportionate random sampling, 280 young investors participated as the respondents. The data were collected through questionnaire surveys, and the Structural Equation Model was employed to analyze the interrelationship among the construct variables. The results reveal that Goal-Based Investing has a positive influence on Risk-Based portfolio Preference and Investment Decision, Risk-based portfolio preference has a positive influence on Investment Decision. In the model, Risk-Based Portfolio Preference functions as a mediating variable.

Regionalist Parties in Central Government: A Shift in Ministerial Portfolio Preferences?

AbstractThis article takes a closer look at the ministerial representation of peripheral elites in central state institutions. We assess the ministerial portfolios that regionalist parties hold once they enter national government. We use a novel dataset that consists of a large sample of ministerial posts (N=1880) allocated to regionalist parties across Western multilevel democracies throughout the post–World War II period. An empirical analysis shows that regionalist parties control a disproportionately high share of the minister posts, a proportionate share of the policy domains, and a disproportionately low share of the key leadership positions in national cabinets. They have a distinctive preference to hold territorial and institutional (that is, decentralization) responsibilities in their ministerial portfolios. In contrast, concerning secondary policy domains (social-economic and culture-identity) they appear to be highly flexible. Ministerial appointments are an important gateway for peripheral elites to get access to central state institutions. It is also one of the clearest manifestations of (policy) payoffs: portfolios are meaningful tools to defend the interests of a territorial subgroup. Yet, there is no straight line from portfolio distribution to policy outcomes at the end of a legislative term. Resolving this broader question of a party’s influence on public policy requires continued research.

‘With respect for the core business’: on regionalist parties and their minister portfolios in government

ABSTRACT This article investigates the relationship between regionalist parties and the minister portfolios they control in government. A novel dataset was constructed which inventories a comprehensive collection of their minister posts (N = 1779). These stem from 77 different regionalist parties across 10 Western multilevel democracies throughout the post-Second World War period (1945–2020). An in-depth analysis shows that governing regionalist parties adhere closely to their ideological core business: territorial, cultural and institutional affairs form a major part of their ministerial responsibilities. The kind of ministries that regionalist parties hold differs between the regional and national levels of government. They obtain more key leadership positions regionally than nationally. Regionalist parties own a disproportionately high number of minister posts at the national level when compared with their actual seat share in parliament. The results from this study improve our understanding of the portfolio preferences and party strategies that regionalist parties employ when they participate in government.

Super‐sizing Renewable Energy Investment: Examining the Portfolio Preferences of Superannuation Fund Members*

We use a discrete choice experiment to quantify whether superannuation fund members value higher allocations of funds to renewable energy investments in their portfolios. Mixed logit modelling provides evidence that this valuation is driven by a fund member's environmental sentiment. Latent class modelling suggests that two classes of superannuation fund members exist: those whose preferences align with a renewable energy transition and those who are focused on financial returns. Our results suggest that the understanding of fiduciary duties, to act in the best interests of members, should be broader than a singular focus on financial returns.

Prioritizing investments in rapid response vaccine technologies for emerging infections: A portfolio decision analysis

This study reports on the application of a Portfolio Decision Analysis (PDA) to support investment decisions of a non-profit funder of vaccine technology platform development for rapid response to emerging infections. A value framework was constructed via document reviews and stakeholder consultations. Probability of Success (PoS) data was obtained for 16 platform projects through expert assessments and stakeholder portfolio preferences via a Discrete Choice Experiment (DCE). The structure of preferences and the uncertainties in project PoS suggested a non-linear, stochastic value maximization problem. A simulation-optimization algorithm was employed, identifying optimal portfolios under different budget constraints. Stochastic dominance of the optimization solution was tested via mean-variance and mean-Gini statistics, and its robustness via rank probability analysis in a Monte Carlo simulation. Project PoS estimates were low and substantially overlapping. The DCE identified decreasing rates of return to investing in single platform types. Optimal portfolio solutions reflected this non-linearity of platform preferences along an efficiency frontier and diverged from a model simply ranking projects by PoS-to-Cost, despite significant revisions to project PoS estimates during the review process in relation to the conduct of the DCE. Large confidence intervals associated with optimization solutions suggested significant uncertainty in portfolio valuations. Mean-variance and Mean-Gini tests suggested optimal portfolios with higher expected values were also accompanied by higher risks of not achieving those values despite stochastic dominance of the optimal portfolio solution under the decision maker’s budget constraint. This portfolio was also the highest ranked portfolio in the simulation; though having only a 54% probability of being preferred to the second-ranked portfolio. The analysis illustrates how optimization modelling can help health R&D decision makers identify optimal portfolios in the face of significant decision uncertainty involving portfolio trade-offs. However, in light of such extreme uncertainty, further due diligence and ongoing updating of performance is needed on highly risky projects as well as data on decision makers’ portfolio risk attitude before PDA can conclude about optimal and robust solutions.

Investor Orientations and Endowment Portfolio Investments in German Foundations

Germany benefits from an especially lively philanthropic sector, with over twenty three thousand active charitable foundations. An empirical assessment of the portfolio preferences of German foundations yields fundamental intragroup differences in their approach to asset allocation. We build on entrepreneurial orientation theory to explore these differences in behavior, motives, rationales and portfolio investment preferences and extract a typology along a commercial and mission orientation in charitable foundations’ investment orientation. We suggest an explanatory model that improves our understanding of the observed differences foundations exhibit in their investment orientation and enables a more structured understanding of the sources of capital for differing commercial and social endeavors.

The Sources of Fiscal Fluctuations

This paper assesses the dynamic impact of global macroeconomic conditions, commodity price movements, shifts in portfolio preferences, and domestic shocks on fiscal outcomes—notably the budget deficit, its main components, and debt—across a wide range of countries. Heterogeneity is investigated across the level of development and other structural characteristics. Dynamics are explored via panel local projections, while robustness is assessed via dynamic panel and system GMM regressions. World growth, financial risk appetite, political events, and commodity export prices are key determinants of fiscal outcomes in EM, while domestic growth, commodity import prices, and banking crises appear to matter more in AE. Our estimates help quantify the amount of fiscal risk generated by various factors, and thus provide inputs for the design of potential insurance mechanisms or state-contingent debt instruments that could assist in smoothing fiscal fluctuations.

The Investment Performance of Ethical Equity Funds in Malaysia

This paper investigates the investment performance of Malaysian Islamic equity funds and a matching sample of conventional equity funds relative to their market benchmark. An integrated model is used to simultaneously capture the market timing and selectivity skills of fund managers. Our findings indicate that the Islamic funds do not match the performance of the conventional funds in terms of selectivity skill. However, Islamic funds perform no worse than their conventional counterparts in market timing, although neither outperform the market. These findings have crucial implications not only for fund managers’ investment decisions, but also for sensitive shariah-compliant investors and risk-seeking investors of Islamic equity funds in their investment portfolio preference.

Reconsideration of the IS–LM model and limitations of monetary policy: a Tobin–Minsky model

The standard IS–LM model considers all types of financial assets, excluding money, as bonds. We construct a modified IS–LM model to better represent the characteristics of financial markets and investigate the stability of the economy. We present bank behavior explicitly and consider household portfolio preferences through the rate of return on financial assets. We build both static and dynamic models that incorporate the dynamic equation of monetary policy. In our model, an increase in the debt–capital ratio may have a negative impact on the profit rate and bring about the so-called “paradox of debt.” We indicate that factors such as the sensitivity of bank lending to the profit rate and the degree of substitutability between the household’s equity and money have a significant effect on the volatility of the profit rate and equity price. Particularly, the latter may lead to an unstable economy in the long run. We show that it is always possible for the economy to become unstable endogenously. The government and central bank must formulate loan regulations and adopt the appropriate monetary policy to stabilize the economy.

The Sources of Fiscal Fluctuations

This paper assesses the dynamic impact of global macroeconomic conditions, commodity price movements, shifts in portfolio preferences, and domestic shocks on fiscal outcomes—notably the budget deficit, its main components, and debt—across a wide range of countries. Heterogeneity is investigated across the level of development and other structural characteristics. Dynamics are explored via panel local projections, while robustness is assessed via dynamic panel and system GMM regressions. World growth, financial risk appetite, political events, and commodity export prices are key determinants of fiscal outcomes in EM, while domestic growth, commodity import prices, and banking crises appear to matter more in AE. Our estimates help quantify the amount of fiscal risk generated by various factors, and thus provide inputs for the design of potential insurance mechanisms or state-contingent debt instruments that could assist in smoothing fiscal fluctuations.

Testing the potential of Multiobjective Evolutionary Algorithms (MOEAs) with Colorado water managers

Multiobjective Evolutionary Algorithms (MOEAs) generate quantitative information about performance relationships between a system's potentially conflicting objectives (termed tradeoffs). Research applications have suggested that evaluating tradeoffs can enhance long term water utility planning, but no studies have formally engaged with practitioners to assess their perceptions of tradeoffs generated by MOEAs. This article examines how practitioners interact with MOEA tradeoffs and reports their ideas for how their agencies could use MOEA results. We hosted a group of Colorado water managers at a charrette, or structured investigatory workshop, where they directly interacted with tradeoffs, discussed how they used the information, and linked their workshop experiences to opportunities for MOEAs to enhance their agencies' planning processes. Among other interesting results, we found that managers' portfolio preferences diverged as tradeoff information increased and that structured information about the relationships between decision levers and performance would be beneficial for interpreting tradeoffs.

Perspectives of Informed Citizen Panel on Low-Carbon Electricity Portfolios in Switzerland and Longer-Term Evaluation of Informational Materials.

Low-carbon transition is gaining momentum, but relatively little is known about the public preferences for low- and zero-carbon electricity portfolios given their environmental, health, and economic impacts. Decision science literature argues that conventional opinion surveys are limited for making strategic decisions because the elicited opinions may be distorted by misconceptions and awareness gaps that prevail in the public. We created an informed citizen panel ( N = 46) in Switzerland using technology factsheets, interactive web-tool Riskmeter, and group discussions. We measured the evolution of the panel's knowledge and preferences from initial (uninformed) to informed and longer-term views 4 weeks after. In terms of energy transition, our elicited technology and portfolio preferences show strong support for the low-carbon electricity sector transition, especially relying on hydropower, solar power, electricity savings and efficiency, and other renewable sources. Since these informed preferences are structurally different from the futures considered by many energy experts, we argue that these preferences should also inform the Swiss Energy Strategy 2050s implementation. In terms of methodologies in decision science, our factsheets, Riskmeter, and group discussions all proved effective in forming the preferences and improving knowledge. But we also intriguingly found that in a longer run the participants tended to revert back to their initial opinions. The latter finding opens up multiple new research questions on the longer-term effectiveness of informational tools and stability of informed preferences.

We choose what we like – Affect as a driver of electricity portfolio choice

Numerous countries are restructuring their electricity systems. Transitioning to electricity systems that are considered acceptable by the public requires that the public's preferences be taken into account. In this study, we investigate the type of energy technology portfolio that people prefer for Switzerland, and why they prefer it, when they are faced with two realistic constraints: (i) the limited domestic potential for the expansion of power plants and (ii) the requirement to not dismantle existing infrastructure. We find that the affect evoked by particular energy technologies is consistently the most important driver of the proportion of those technologies included in an energy portfolio. The regression models for the investigated technologies explain between 14% and 54% of the variance, providing strong support for the affect heuristic. We further find that concerns regarding environmental impacts, costs or climate change play an additional role for portfolio preferences. This is reflected in four different clusters we identified for the German-speaking Swiss population who potentially hold opposing views as to what they consider the best electricity mix. For policymakers, our findings suggest that positive affective reactions towards energy technologies are necessary, although concerns must also be considered if the implementation is to be widely accepted.

A LOGISTIC NONLINEAR BLACK-SCHOLES-MERTON PARTIAL DIFFERENTIAL EQUATION: EUROPEAN OPTION

Nonlinear Black-Scholes equations provide more accurate values by taking into account more realistic assumptions, such as transaction costs, illiquid markets, risks from an unprotected portfolio or large investor's preferences, which may have an impact on the stock price, the volatility, the drift and the option price itself. Most modern models are represented by nonlinear variations of the well-known Black-Scholes Equation. On the other hand, asset security prices may naturally not shoot up indefinitely (exponentially) leading to the use of Verhulst’s Logistic equation. The objective of this study was to derive a Logistic Nonlinear Black Scholes Merton Partial Differential equation by incorporating the Logistic geometric Brownian motion. The methodology involves, analysis of the geometric Brownian motion, review of logistic models, process and lemma, stochastic volatility models and the derivation of the linear and nonlinear Black-Scholes-Merton partial differential equation. Illiquid markets have also been analyzed alongside stochastic differential equations.
 The result of this study may enhance reliable decision making based on a rational prediction of the future asset prices given that in reality the stock market may depict a nonlinear pattern.