A Multi-Objective Decision Making Approach For Mutual Fund Portfolio

Abstract

Investment decision-making problems are generally multi-objective in nature such as minimization of the risk and maximization of the return.  These problems can be solved efficiently and effectively using multi-objective decision making (MODM) tools such as a lexicographic goal programming (LGP).  This paper applies the LGP model for selecting an optimum mutual fund portfolio for an investor, while taking into account specific parameters including risk, return, expense ratio and others.  Using sensitivity analysis on the weights in a priority structure of the goals identifies all possible solutions in the decision-making process.  The Euclidean distance method is then used, to measure distances of all possible solutions from the identified ideal solution.  The optimum possible solution is determined by the minimum distance between the ideal solution and other possible solutions of the problem.  The associated weights will be the most appropriate weights in a given priority structure.  The effectiveness and applicability of the LGP model is demonstrated via a case example from broad categories of mutual funds.