Behavioural dimension in portfolio optimization : An analytical exposition

Abstract

Portfolio optimization mainly intervenes the various financial modeling to optimize the profit out of investment by assuming many variations in the financial landscape. The classical portfolio theories are suffered from the selection of the assets in the portfolio as well as identification of the proportion of investment in each asset in the portfolio. And also the classical models are very critical to understand due to the existence of highly statistical tools. Therefore, this paper has made an attempt to simplify the classical optimization problem with some heuristic approach. The behavioral characteristics of the investors have been taken care off. Three kinds of investors have considered for the present paper-optimistic, pessimistic and risk planner. Then a portfolio of 15 companies has been selected from Nifty 50 companies randomly. Some heuristic weights have been generated to get portfolio return and risk which is free from heavy statistical understanding. The nonlinear programming helps to generate the portfolio risk and return with the introduction of the coefficient of optimism. The empirical result shows that the investors can select the portfolio based on their risk taking propensity which can give near optimum solution.

Subject Classification:

• Game theory
• Economics
• Social and behavioral sciences

Keywords:

• Portfolio Optimization
• Mean-Variance Model
• Heuristic Portfolio
• Coefficient of Optimism