Stochastic portfolio optimization using efficiency evaluation

Abstract

Purpose

The purpose of this paper is to analyze portfolios chosen using an efficiency evaluation that considers risk and uncertainty and optimizes the allocation of invested capital using the Sharpe approach.

Design/methodology/approach

The portfolios comprised shares on the Sao Paulo Stock Exchange. A chance-constrained data envelopment analysis stochastic optimization model was used, and return and variance were employed as input and output variables.

Findings

The model was shown to be viable. It reduced the search space and considered data randomness.

Originality/value

Three portfolios were proposed. The variation of the model’s risk criterion fulfilled the requirements of investors with different attitudes to risk. The model proposed can be used as a support tool for stock investment decisions.

Citation

Rotela Junior, P., Pamplona, E.d.O., Rocha, L.C.S., Valerio, V.E.d.M. and Paiva, A.P. (2015), "Stochastic portfolio optimization using efficiency evaluation", Management Decision, Vol. 53 No. 8, pp. 1698-1713. https://doi.org/10.1108/MD-11-2014-0644