Portfolio evaluation using OWA‐heuristic algorithm and data envelopment analysis

Abstract

Purpose

The purpose of this paper is to evaluate two different asset selection methodologies and further examine these by forming optimal portfolios.

Design/methodology/approach

This paper deals with the problem of portfolio formation, broadly in two steps: asset selection and asset allocation by using the two different approaches for the first step and then well‐known mean variance portfolio optimization. In addition, the resulting portfolios are compared using Sharpe ratio.

Findings

The empirical observations prove the applicability of the methodology adopted in the research design, ordered weighted averaging (OWA)‐heuristic algorithm gives us a better portfolio from the sample observations. Also the asset selection procedures adopted in the research proves to be of help when an investor has to narrow down the number of assets to invest in.

Practical implications

The analysis provides two different methodologies for portfolio formation – though the asset allocation is based on the mean variance portfolio optimization, the asset selection methods adopted provide a systematic approach to select the efficient securities.

Originality/value

This paper shows that OWA can be used to decide the order of inputs for the heuristic algorithm. Also an attempt is made to use data envelopment analysis to find a solution to the problem of portfolio formation.

Citation

Singh, A.K., Sahu, R. and Bharadwaj, S. (2010), "Portfolio evaluation using OWA‐heuristic algorithm and data envelopment analysis", Journal of Risk Finance, Vol. 11 No. 1, pp. 75-88. https://doi.org/10.1108/15265941011012697