Integrated bi-criteria decision support system for portfolio selection

In this paper, we consider a bi-criteria approach to address the problem of portfolio construction and selection, taking into account the weaknesses of Markowitz' MeanVariance portfolio selection. Portfolio theory has many drawbacks, multiple criteria modelling and optimisation is time consuming and generally very demanding from the viewpoint of necessary hardware resources, and every investor is characterised by different preferences. To effectively address these issues, this paper presents an integrated and innovative methodological approach, within the frame of bi-objective mathematical programming for constructing and selecting portfolios. The validity of the proposed approach is tested through an illustrative application in the New York Stock Exchange. Moreover, we evaluate the differences and similarities between the efficient frontier of the proposed model and the classical Mean-Variance. We show that, having the individual investor's preferences incorporated, the proposed utilitybased model provides more suitable efficient portfolios which differ markedly from the classical Mean- Variance efficient portfolios.