Abstract
This paper adopts the multi-criterion decision-making model of fuzzy-TODIM and genetic algorithm (GA) for optimal portfolio allocation. We applied Markowitz’s portfolio parameters as inputs for the fuzzy TODIM model to rank stocks that are constituents of each index from three different markets. Portfolios are then generated dynamically using three weighting techniques and subject to multi-objective criteria and additional constraints. The results indicate a significant variation in performance metrics between the model-generated portfolios and the market indices. Replication of the procedure produces a similar outcome. Moreover, the out-of-sample tests conducted over 3 years validate the results’ robustness, indicating that fuzzy TODIM, combined with GA, can achieve superior performance in dynamic portfolio allocation.
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Notes
MCDM models include a wide variety like tabu search, genetic algorithm, and simulated annealing (Chang et al., 2000; Ehrgott et al., 2004; Liu & Zhang, 2015); multi-objective evolutionary algorithm (Branke et al., 2009); particle swarm optimization (Deng et al., 2012; Kaucic, 2019), artificial bee colony (Chen, 2015), and fireworks algorithm (Zhang & Liu, 2017) which have been widely adapted to address multiple objectives as well as constraints in portfolio optimization.
For details, see Xiao et al. (2012)
Throughout this paper, we have reported the results only for the Indian market for the sake of brevity. The findings regarding the United States and United Kingdom markets (S&P 500 and FTSE 100) can be found in the Appendix.
We have experimented with various combinations of lower and upper limits for all three indexes.
The results of S&P 500 and FTSE 100 emulate that of Nifty 50 index.
We have not reported the Sharpe’s results for the sake of brevity and be sourced from the authors on request. We have also used alternative techniques for validation.
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Banerjee, A.K., Pradhan, H.K., Sensoy, A. et al. Robust portfolio optimization with fuzzy TODIM, genetic algorithm and multi-criteria constraints. Ann Oper Res (2024). https://doi.org/10.1007/s10479-024-05865-1
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DOI: https://doi.org/10.1007/s10479-024-05865-1