Characterizing compromise solutions for investors with uncertain risk preferences

Francisco Salas-Molina, Juan A. Rodríguez-Aguilar, David Plà-Santamaria

Abstract: The optimum portfolio selection for an investor with particular preferences was proven to lie on the normalized efficient frontier between two bounds defined by the Ballestero (J Oper Res Soc 49:998–1000, 1998) bounding theorem. A deeper understanding is possible if the decision-maker is provided with visual and quantitative techniques. Here, we derive useful insights as a way to support investor’s decision-making through: (1) a new theorem to assess balance of solutions; (2) a procedure and a new plot to deal with discrete efficient frontiers and uncertain risk preferences; and (3) two quality metrics useful to predict long-run performance of investors.