Portfolio optimization with Fraction of Expectation to Risk of future financial strength based on Eigen Vector of Pairwise Comparisons Matrix

Subject Areas : Financial engineering

Keikhosro Yakideh ¹ , Gholamreza Mahfoozi ² , Mahshid Goodarzi ³

1 - Assistant Professor of Management, University of Guilan, Rasht- Iran
2 - Assistant Professor of Management, University of Guilan, Rasht- Iran
3 - MSc Management, University of Guilan, Rasht- Iran

Received: 2017-02-03 Accepted : 2017-10-13 Published : 2017-09-23

Keywords: Portfolio optimization, Cross efficiency, Analytical Hierarchy Process (AHP,

Abstract :

The aim of this study is to propose a new method for portfolio optimization based on financial ratios. In this method, cross efficiency scores are produced from financial ratios, using Data Envelopment Analysis. Mathematical interpretation of these cross efficiency scores that allocates several score to each company is efficiency of company in probably future situations. Efficiency scores calculated based on proper financial ratios can be considered as financial strength. Thus cross efficiency scores produced from financial ratios, can be considered as potential financial strength. As future is not clear, potential financial strength can be presented in expectation and risk indices that are mean and variance of cross efficiencies. Fraction of expectation to risk for potential financial strengths can be used as a criterion for pairwise comparison of companies. Eigenvector associated with the biggest eigenvalue of pairwise comparison matrix reflects relative importance weights of companies. This paper proposes relative importance weights of companies as a basis for portfolio optimization.  Based on sharp index Performance of proposed method is acceptable and better than marker portfolio and portfolio of one similar method.