Ethicality Considerations in Multi-criteria Fuzzy Portfolio Optimization

Abstract

Of late, the investors have shown great interest in socially responsible investment, also called ethical investment. Ideally, the investors may have a portfolio that is based not only on financial considerations but also incorporates a set of ethical values. The ethical investment movement that began from the USA in 1960s has gained tremendous momentum the world over recently. The growing instances of corporate scams and scandals have made it incumbent upon the investors to consider the quality of governance of corporations and ethicality of their conduct. Indeed, there has been a spate of reforms relating to corporate laws and capital markets all over the world. Also, the investors are becoming conscious of the desirability of ethical evaluation of the assets. The growing influence of institutional investors has reinforced this consciousness. The focus of this chapter is to present a comprehensive three-stage multiple criteria decision making framework for portfolio selection based upon financial and ethical criteria simultaneously. Fuzzy analytical hierarchy process (Fuzzy-AHP) technique is used to obtain the ethical performance score of each asset based upon investor preferences. A fuzzy multiple criteria decision making (Fuzzy-MCDM) method is used to obtain the financial quality score of each asset based upon investor-ratings on the financial criteria. Two hybrid portfolio optimization models are presented to obtain well diversified financially and ethically viable portfolios.