In this paper, behavioral construct of suitability is used to develop a multi-criteria decision making framework for portfolio selection. To achieve this purpose, we rely on multiple methodologies. Analytical hierarchy process technique is used to model the suitability considerations with a view to obtaining the suitability performance score in respect of each asset. | Yugoslav Journal on Operations Research 23(2013) Number 2, 279–297 DOI: BEHAVIORAL OPTIMIZATION MODELS FOR MULTICRITERIA PORTFOLIO SELECTION Mukesh Kumar MEHLAWAT Department of Operational Research, University of Delhi, Delhi, India mukesh0980@ Received: January, 2013 / Accepted: March, 2013 Abstract: In this paper, behavioral construct of suitability is used to develop a multi-criteria decision making framework for portfolio selection. To achieve this purpose, we rely on multiple methodologies. Analytical hierarchy process technique is used to model the suitability considerations with a view to obtaining the suitability performance score in respect of each asset. A fuzzy multiple criteria decision making method is used to obtain the financial quality score of each asset based upon investor’s rating on the financial criteria. Two optimization models are developed for optimal asset allocation considering simultaneously financial and suitability criteria. An empirical study is conducted on randomly selected assets from National Stock Exchange, Mumbai, India to demonstrate the effectiveness of the proposed methodology. Keywords: Portfolio selection; Behavioral optimization model; Fuzzy multiple criteria decision making; Analytical hierarchy process MSC: 90C29; 91G10; 03E72 1. INTRODUCTION Portfolio selection as a field of study began with the Markowitz model [20] in which return is quantified as the mean and risk as the variance. Traditionally, portfolio selection models have solely relied on financial criteria such as 279 280 M. K. Mehlawat / Behavioral Optimization Models For Multicriteria return, risk and liquidity as the determinants of asset quality [1, 8, 9, 12]. Of late, one witnesses some research effort toward incorporating suitability criteria as well. Suitability is a behavioral concept that refers to the propriety of the match between investor-preferences and portfolio characteristics. Financial experts and investment
