Risk management in multi-objective portfolio optimization under uncertainty

ArXiv ID: 2407.19936 “View on arXiv”

Authors: Unknown

Abstract

In portfolio optimization, decision makers face difficulties from uncertainties inherent in real-world scenarios. These uncertainties significantly influence portfolio outcomes in both classical and multi-objective Markowitz models. To address these challenges, our research explores the power of robust multi-objective optimization. Since portfolio managers frequently measure their solutions against benchmarks, we enhance the multi-objective min-regret robustness concept by incorporating these benchmark comparisons. This approach bridges the gap between theoretical models and real-world investment scenarios, offering portfolio managers more reliable and adaptable strategies for navigating market uncertainties. Our framework provides a more nuanced and practical approach to portfolio optimization under real-world conditions.

Keywords: Robust optimization, Multi-objective optimization, Min-regret strategy, Benchmark tracking, Markowitz model, Portfolio Management

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 6.5/10
  • Quadrant: Holy Grail
  • Why: The paper employs advanced mathematical concepts like Pareto fronts, min-regret robustness, and specific robust counterpart formulations requiring detailed derivations, which drives up math complexity. It also demonstrates empirical rigor by testing the framework on real asset data across three market regimes, providing visualizations of Pareto fronts and benchmark comparisons, though it lacks explicit backtesting code or deep statistical validation.
  flowchart TD
    A["Research Goal:<br>Improve Portfolio Optimization<br>under Uncertainty"] --> B["Methodology:<br>Robust Multi-Objective<br>Min-Regret Optimization"]
    B --> C["Key Input:<br>Financial Market Data<br>with Benchmarks"]
    C --> D["Computational Process:<br>Multi-Objective<br>Markowitz Model"]
    D --> E["Computation:<br>Calculate Min-Regret<br>Robust Portfolios"]
    E --> F["Outcome:<br>Reliable Strategies<br>Connecting Theory to Practice"]