The Quantitative Diversity Index in Multi-Objective Portfolio Model
The primary purpose of investors is maximizing the utility that is characterized by two essential criteria include risk and return. Regarding investors' uncertainty about the future, one of the main ways to reduce risk is to diversify the investment portfolio. In this research, we proposed an i...
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| Format: | Article |
| Language: | English |
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Iran Finance Association
2021-01-01
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| Series: | Iranian Journal of Finance |
| Subjects: | |
| Online Access: | https://www.ijfifsa.ir/article_125101_daa79beb5814a5e64ccc5b563e6dfbc4.pdf |
| _version_ | 1797987131179663360 |
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| author | Seyed Babak Ebrahimi Mostafa Abdollahi Moghadam Nasser Safaie |
| author_facet | Seyed Babak Ebrahimi Mostafa Abdollahi Moghadam Nasser Safaie |
| author_sort | Seyed Babak Ebrahimi |
| collection | DOAJ |
| description | The primary purpose of investors is maximizing the utility that is characterized by two essential criteria include risk and return. Regarding investors' uncertainty about the future, one of the main ways to reduce risk is to diversify the investment portfolio. In this research, we proposed an index conducted by Euclidean distance for assessing portfolio diversity. Besides, we designed a multi-objective model to select optimal stock portfolios with considering value at risk (VaR), which is one of the critical indicators of unacceptable risk, portfolio Beta as systematic risk, and portfolio variance as unsystematic risk simultaneously. The model presented in this paper aims to maximize diversification while minimizing value at risk and stock risks. Furthermore, maximizing returns are considered as a limitation of this model. Since the proposed model is nonlinear and concerning computational complexity, it is NP-hard; therefore, we utilized the PSO and the GE metaheuristic algorithms that are improved for solving multi-objective problems to solve the model. The results of the model implementation in multiple iterations showed that the average yield of selected portfolios by the model is higher than the desirable condition. The evaluation of stock performance indicators also shows the satisfactory performance of the multi-objective model. |
| first_indexed | 2024-04-11T07:42:48Z |
| format | Article |
| id | doaj.art-4a68a1e8a51b47f2ad3851e0c2d7238d |
| institution | Directory Open Access Journal |
| issn | 2676-6337 2676-6345 |
| language | English |
| last_indexed | 2024-04-11T07:42:48Z |
| publishDate | 2021-01-01 |
| publisher | Iran Finance Association |
| record_format | Article |
| series | Iranian Journal of Finance |
| spelling | doaj.art-4a68a1e8a51b47f2ad3851e0c2d7238d2022-12-22T04:36:25ZengIran Finance AssociationIranian Journal of Finance2676-63372676-63452021-01-015112214610.30699/ijf.2021.125101125101The Quantitative Diversity Index in Multi-Objective Portfolio ModelSeyed Babak Ebrahimi0Mostafa Abdollahi Moghadam1Nasser Safaie2Associate Prof., Faculty of Industrial Engineering, K.N. Toosi University of Technology, Tehran, Iran. Pardis St. Molasadra Ave., Vanak Sq, Tehran 19395-1999, IranPh.D. Candidate, Department of Financial Engineering, Faculty of Industrial Engineering, K.N. Toosi University of Technology, Tehran, Iran. Pardis St. Molasadra Ave., Vanak Sq, Tehran 19395-1999, IranAssistant Prof., Faculty of Industrial Engineering, K.N. Toosi University of Technology, Tehran, Iran.The primary purpose of investors is maximizing the utility that is characterized by two essential criteria include risk and return. Regarding investors' uncertainty about the future, one of the main ways to reduce risk is to diversify the investment portfolio. In this research, we proposed an index conducted by Euclidean distance for assessing portfolio diversity. Besides, we designed a multi-objective model to select optimal stock portfolios with considering value at risk (VaR), which is one of the critical indicators of unacceptable risk, portfolio Beta as systematic risk, and portfolio variance as unsystematic risk simultaneously. The model presented in this paper aims to maximize diversification while minimizing value at risk and stock risks. Furthermore, maximizing returns are considered as a limitation of this model. Since the proposed model is nonlinear and concerning computational complexity, it is NP-hard; therefore, we utilized the PSO and the GE metaheuristic algorithms that are improved for solving multi-objective problems to solve the model. The results of the model implementation in multiple iterations showed that the average yield of selected portfolios by the model is higher than the desirable condition. The evaluation of stock performance indicators also shows the satisfactory performance of the multi-objective model.https://www.ijfifsa.ir/article_125101_daa79beb5814a5e64ccc5b563e6dfbc4.pdfsystematic/unsystematic risksvardiversity indexportfolio optimization |
| spellingShingle | Seyed Babak Ebrahimi Mostafa Abdollahi Moghadam Nasser Safaie The Quantitative Diversity Index in Multi-Objective Portfolio Model Iranian Journal of Finance systematic/unsystematic risks var diversity index portfolio optimization |
| title | The Quantitative Diversity Index in Multi-Objective Portfolio Model |
| title_full | The Quantitative Diversity Index in Multi-Objective Portfolio Model |
| title_fullStr | The Quantitative Diversity Index in Multi-Objective Portfolio Model |
| title_full_unstemmed | The Quantitative Diversity Index in Multi-Objective Portfolio Model |
| title_short | The Quantitative Diversity Index in Multi-Objective Portfolio Model |
| title_sort | quantitative diversity index in multi objective portfolio model |
| topic | systematic/unsystematic risks var diversity index portfolio optimization |
| url | https://www.ijfifsa.ir/article_125101_daa79beb5814a5e64ccc5b563e6dfbc4.pdf |
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