News
New paper on integrating multiple sources of ordinal information in portfolio optimization
03.02.2025In a new paper, recently accepted for publication in Annals of Operations Research, FiRe member Roland Mestel and his co-authors Eranda Cela, Stephan Hafner and Ulrich Pferschy present two different approaches for incorporating multiple qualitative views specified as total orders of the expected asset returns in a mean–variance portfolio optimization model. (1) In the robust optimization approach they first compute a posterior expectation of asset returns for every given total order by an extension of the Black–Litterman (BL) framework. Then these expected asset returns are considered as possible input scenarios for robust optimization variants of the mean–variance portfolio model. (2) In the order aggregation approach rules from social choice theory are used to aggregate the individual total orders into a single “consensus total order”. Then expected asset returns are computed for this “consensus total order” by the extended BL framework. Finally, these expectations are used as an input of the classical mean–variance optimization. Using empirical data the authors empirically compare the success of the two approaches in the context of portfolio performance analysis and observe that aggregating orders by social choice methods mostly outperforms robust optimization based methods.