Two-Stage Fuzzy Portfolio Selection Problem with Transaction Costs

Abstract EN

This paper studies a two-period portfolio selection problem.

The problem is formulated as a two-stage fuzzy portfolio selection model with transaction costs, in which the future returns of risky security are characterized by possibility distributions.

The objective of the proposed model is to achieve the maximum utility in terms of the expected value and variance of the final wealth.

Given the first-stage decision vector and a realization of fuzzy return, the optimal value expression of the second-stage programming problem is derived.

As a result, the proposed two-stage model is equivalent to a single-stage model, and the analytical optimal solution of the two-stage model is obtained, which helps us to discuss the properties of the optimal solution.

Finally, some numerical experiments are performed to demonstrate the new modeling idea and the effectiveness.

The computational results provided by the proposed model show that the more risk-averse investor will invest more wealth in the risk-free security.

They also show that the optimal invested amount in risky security increases as the risk-free return decreases and the optimal utility increases as the risk-free return increases, whereas the optimal utility increases as the transaction costs decrease.

In most instances the utilities provided by the proposed two-stage model are larger than those provided by the single-stage model.