Structuring portfolio selection criteria for interactive decision support

Abstract

A trichotomic evaluation system for portfolio selection support is proposed through this paper. The methodology works in two phases: First, Arbitrage Pricing Theory (APT) is used to estimate portfolios’ expected return and to identify influence factors and risk origins. ELECTRE TRI method aggregates all the common risk criteria into a unique one, which is more understandable by real investors or portfolio managers. By this way each alternative portfolio is evaluated on three criteria only including return, residual risk and common risk. In the second phase, the MINORA multicriteria interactive system based on preference disaggregation is proposed to select attractive portfolios. The whole methodological framework is illustrated by an application to the French stock market.