Robust Portfolio Optimization based on Evidence Theory

Abstract

During the past few years, there have been some turbulent events in the world's economy, which have significantly influenced the performance of companies. Therefore, there is an urgent need to use a robust method to handle the existing uncertainties on the performance of the companies. This paper uses Evidence Theory (ET) to present an innovative and practical approach to consider the experts’ opinions which are based on the available evidence regarding the factors that influence the stock market. Subsequently, the study proposes a way to determine the changes in these factors from possible scenarios on historical data to find the return range of different investment alters to be used in robust optimization. Moreover, in a case study, the study examined the sensitivity of the Iranian capital market to exchange rate fluctuations under different scenarios which were due to the lack of a unified view of that rate’s value among experts as one of the mentioned factors. The preliminary results of a real-life case study reveal that the submitted approach is productive and practically useful.