Multiobjective Programming and Multiattribute Utility Functions in Portfolio Optimization

Abstract In recent years portfolio optimization models that consider more criteria than the expected return and variance objectives of the Markowitz model have become popular. These models are harder to solve than the quadratic mean-variance problem. Two approaches to find a suitable portfolio for an investor are possible. In the multiattribute utility theory (MAUT) approach a utility function is constructed based on the investor's preferences and an optimization problem is solved to find a portfolio that maximizes the utility function. In the multiobjective programming (MOP) approach a set of efficient portfolios is computed by optimizing a scalarized objective function. The investor then chooses a portfolio from the efficient set according to his/her preferences. We outline these two approaches using the UTADIS method to construct a utility function and present numerical results for an example.

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