Abstract
This paper develops two novel types of mean-variance models for portfolio selection problems, in which the security returns are assumed to be characterized by fuzzy random variables with known possibility and probability distributions. In the proposed models, we take the expected return of a portfolio as the investment return and the variance of the expected return of a portfolio as the investment risk. We assume that the security returns are triangular fuzzy random variables. To solve the proposed portfolio problems, this paper first presents the variance formulas for triangular fuzzy random variables. Then this paper applies the variance formulas to the proposed models so that the original portfolio problems can be reduced to nonlinear programming ones. Due to the reduced programming problems include standard normal distribution in the objective functions, we cannot employ the conventional solution methods to solve them. To overcome this difficulty, this paper employs genetic algorithm (GA) to solve them, and verify the obtained optimal solutions via Kuhn-Tucker (K-T) conditions. Finally, two numerical examples are presented to demonstrate the effectiveness of the proposed models and methods.
Similar content being viewed by others
References
Markowitz, H.: Portfolio selection. J. Finance 7, 77–91 (1952)
Li, S.X.: An insurance and investment portfolio model using chance constrained programming. Omega 23, 577–585 (1995)
Williams, J.O.: Maximizing the probability of achieving investment goals. J. Portfolio Manag. 24, 77–81 (1997)
Konno, H., Yamakazi, H.: Mean-absolute deviation portfolio optimization model and its applications to Tokio stock market. Manag. Sci. 37, 519–531 (1991)
Simaan, Y.: Estimation risk in portfolio selection: the mean variance model versus the mean absolute deviation model. Manag. Sci. 4, 1437–1446 (1997)
Harlow, W.V., Rao, R.K.S.: Asset pricing in a generalized mean-lower partial moment framework: Theory and evidence. J. Financ. Quant. Anal. 3, 285–311 (1989)
Cai, X., Teo, K.L., Yang, X., Zhou, X.: Portfolio optimization under a minimax rule. Manag. Sci. 46, 957–972 (2000)
Deng, X.T., Li, Z.F., Wang, S.Y.: A minimax portfolio selection strategy with equilibrium. Eur. J. Oper. Res. 166, 278–292 (2005)
Abdelaziz, F.B., Aouni, B., Fayedh, R.E.: Multi-objective stochastic programming for portfolio selection. Eur. J. Oper. Res. 177, 1811–1823 (2007)
Corazza, M., Favaretto, D.: On the existence of solutions to the quadratic mixed-integer mean-variance portfolio selection problem. Eur. J. Oper. Res. 176, 1947–1960 (2007)
Zadeh, L.A.: Fuzzy sets. Inf. Control 8, 338–353 (1965)
Tanaka, H., Guo, P.: Portfolio selection based on fuzzy probabilities and possibility distributions. Fuzzy Sets Syst. 111, 387–397 (2000)
Parra, M.A., Terol, A.B.: A fuzzy goal programming approach to portfolio selection. Eur. J. Oper. Res. 133, 287–297 (2001)
Carlsson, C., Fullér, R., Majlender, P.: A possibilistic approach to selecting portfolios with highest utility score. Fuzzy Sets Syst. 131, 13–21 (2002)
Zhang, W.G., Nie, Z.K.: On admissible efficient portfolio selection problem. Appl. Math. Comput. 159, 357–371 (2004)
Lin, C., Tan, B., Hsieh, P.J.: Application of the fuzzy weighted average in strategic portfolio management. Decis. Sci. 36, 489–511 (2005)
Bilbao-Terol, A., Pérez-Gladish, B., Arenas-Parra, M.: Fuzzy compromise programming for portfolio selection. Appl. Math. Comput. 173, 251–264 (2006)
Sharpe, W.: A simplified model for portfolio analysis. Manag. Sci. 9, 277–293 (1963)
Liu, B.: Uncertainty Theory: An Introduction to Its Axiomatic Foundations. Springer, Berlin (2004)
Liu, B.: A survey of credibility theory. Fuzzy Optim. Decis. Making 5, 387–408 (2006)
Kwakernaak, H.: Fuzzy random variables I: Definitions and theorems. Inf. Sci. 15, 1–29 (1978)
Feng, X., Liu, Y.-K.: Measurability criteria for fuzzy random vectors. Fuzzy Optim. Decis. Making 5, 245–253 (2006)
Liu, Y.-K., Liu, B.: Fuzzy random variable: A scalar expected value operator. Fuzzy Optim. Decis. Making 2, 143–160 (2003)
Liu, Y.-K., Gao, J.: The independence of fuzzy variables with applications to fuzzy random optimization. Int. J. Uncertain. Fuzziness Knowl. Based Syst. 15, 1–20 (2007)
Wang, G., Qiao, Z.: Linear programming with fuzzy random variable coefficients. Fuzzy Sets Syst. 57, 295–311 (1993)
Luhandjula, M.K.: Fuzziness and randomness in an optimization framework. Fuzzy Sets Syst. 77, 291–297 (1996)
Liu, Y.-K., Liu, B.: A class of fuzzy random optimization: expected value models. Inf. Sci. 155, 89–102 (2003)
Liu, Y.-K., Liu, B.: On minimum-risk problems in fuzzy random decision systems. Comput. Oper. Res. 32, 257–283 (2005)
Liu, Y.-K.: The approximation method for two-stage fuzzy random programming with recourse. IEEE Trans. Fuzzy Syst. 15, 1197–1208 (2007)
Liu, B.: Theory and Practice of Uncertain Programming. Physica, Heidelberg (2002)
Liu, Y.-K., Wang, S.: Theory of Fuzzy Random Optimization. China Agricultural University Press, Beijing (2006)
Bazaraa, M.S., Shetty, C.M.: Nonlinear Programming. Wiley, New York (1979)
Liu, B., Liu, Y.-K.: Expected value of fuzzy variable and fuzzy expected value models. IEEE Trans. Fuzzy Syst. 10, 445–450 (2002)
Li, S.X., Huang, Z.: Determination of the portfolio selection for a property-liability insurance company. Eur. J. Oper. Res. 88, 257–268 (1996)
Holland, J.: Adaptation in Natural and Artificial Systems. University of Michigan Press, Ann Arbor (1975)
Goldberg, D.E.: Genetic Algorithms in Search, Optimization and Machine Learning. Addison-Wesley, Reading (1989)
Koza, J.: Genetic Programming II. MIT Press, Cambridge (1994)
Gen, M., Cheng, R.W.: Genetic Algorithms and Engineering Optimization. Wiley, New York (2000)
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Hao, FF., Liu, YK. Mean-variance models for portfolio selection with fuzzy random returns. J. Appl. Math. Comput. 30, 9–38 (2009). https://doi.org/10.1007/s12190-008-0154-0
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12190-008-0154-0
Keywords
- Fuzzy random programming
- Fuzzy random variable
- Portfolio selection
- Expected value
- Variance
- K-T conditions
- Genetic algorithm