A possibilistic approach to selecting portfolios with highest utility score

The mean-variance methodology for the portfolio selection problem, originally proposed by Markowitz, has been one of the most important research fields in modem finance. In this paper we will assume that: (i) each investor can assign a welfare, or utility, score to competing investment portfolios based on the expected return and risk of the portfolios; and (ii) the rates of return on securities are modelled by possibility distributions rather than probability distributions. We will present an algorithm of complexity o(n(3)) for finding an exact optimal solution (in the sense of utility scores) to the n-asset portfolio selection problem under possibility distributions. (C) 2001 Elsevier Science B.V. All rights reserved.