Asset Allocation: An Application Of The Analytic Hierarchy Process

Abstract

The objective of this paper is to develop a theoretically sound approach for determining the appropriateness of an investment allocation for a particular investor. A methodology using an Analytic Hierarchy Process (AHP) is suggested as a means of formalizing the process of determining the suitability of a potential investment portfolio to a potential investor. The AHP has been applied to a variety of business decisions and processes requiring high degrees of subjective judgment. The result of this model is an asset allocation scheme tailored to the specific requirements of an individual investor. Although the AHP process is a subjective weighting technique that relies upon the judgment of the decision-maker, it does so in a manner that is more systematic and consistent than traditional subjective decision-making.