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2, APRIL 2017 363

Adaptive Budget-Portfolio Investment Optimization
Under Risk Tolerance Ambiguity
Shuming Wang, Bo Wang, and Junzo Watada, Member, IEEE

Abstract—In this study, we consider a portfolio-optimization- primitively credited to the prospect theory proposed by Kahne-
incorporated budget investment problem under managers’ risk man and Tversky (see [11] and [27]). One of the key challenges
tolerance ambiguity. In order to capture the decision dynamics of studying the investor’s behavior lies in the modeling of the
driven by the risk tolerance ambiguity, a two-stage adaptive opti-
mization model is developed. The budget allocation is the first-stage individual’s ambiguous risk tolerance (see [14] and [15]). In
decision, which is made before knowing each manager’s actual risk this paper, we investigate an adaptive budget investment prob-
tolerance level, and the portfolio selection conducted by each man- lem that incorporates portfolio selections under managers’ risk
ager is the second-stage decision, which adapts to the manager’s tolerance ambiguity.
risk tolerance. We introduce the concept of risk-neutral budget Before the presentation of our work, let us briefly review the
threshold (RNBT) that is modeled by a fuzzy set granule, and upon
which the ambiguous risk tolerance curve is constructed, which can existing studies in investment and portfolio optimization. Port-
realistically capture the managers’ risk-averse and/or risk-seeking folio optimization as a typical (budget) investment problem aims
attitudes. Due to the (realistic) nonconvex/nonconcave structure of at allocating the capital to some specified securities so that the
the risk tolerance curve, and the existence of the ambiguity, the investment can maximize the profit or minimize the risk. The fa-
resulting problem is essentially a nonconvex adaptive optimiza- mous mean-variance portfolio optimization model proposed by
tion problem under uncertainty. To achieve a robust modeling and
an efficient solution, we first restructure and robustize the infor- Markowitz [17] in 1952 utilizes a single-period variance of the
mation of fuzzy RNBTs and then transform the developed model security returns as the risk measurement. The mean-variance
into a mixed integer linear programming (MILP), which can be model basically shaped a standard mean-risk pattern for the
handled efficiently by off-the-shelf mixed integer program solvers. portfolio optimization. It is known that variance as a criterion
Leveraging the derived MILP structure, we can use the Benders measuring the return’s deviation from the mean cannot capture
decomposition to further enhance the scalability of the model. Fur-
thermore, some model extensions on robustizing the probability the loss information, due to its indifference to the positive and
estimations are discussed. Finally, computational studies are per- negative deviation. However, clearly, it is the latter (potential
formed to demonstrate the effectiveness and insights of the model. loss) that attracts more of the investors’ concern on risk. To
Index Terms—Ambiguity, budget and portfolio investment,
this end, many other risk measurement tools have been imple-
fuzzy set granule, mixed integer program (MIP), risk-neutral mented, such as value-at-risk (VaR) [12], [30], expected gain-
budget threshold (RNBT), risk tolerance. confidence limit criterion [2], earning-at-risk [16], conditional
VaR (CVaR, also named expected shortfall in the literature) [23],
positive/negative skewness [13], risk-based project value [25],
INANCIAL investments, more often than not if not always, and mean-absolute-semi-deviation measure [28]. Among them
F are affected by the human risk tolerance and appetite dur-
ing the decision-making process of the investments. One of the
is the CVaR criterion that belongs to a class of preferable risk
measures: coherent risk measures (see [7]), which preserves
greatest breakthroughs along the evolution of modern finance is many desirable properties, especially the convexity (computa-
the recognition of the irrational financial behaviors of the de- tional benefits) and risk diversification. Hence, in this study, we
cision makers in uncertain and risky environments, which was utilize CVaR to measure the risk.
Note that the profit criterion and risk criterion (and some
Manuscript received August 3, 2015; revised October 1, 2015 and January possible others) in the portfolio optimization are distinct
20, 2016; accepted April 6, 2016. Date of publication June 21, 2016; date of objectives. Sometimes, decision makers may need to choose
current version March 29, 2017. The work was supported in part by the Young an investment scheme that maximizes the profit and minimizes
Scientists Fund of the National Natural Science Foundation of China (Grant
No. 71402176) and in part by the Major Research Plan of the National Natural the potential risk simultaneously. Therefore, a number of
Science Foundation of China (Grant No. 91538113). multiobjective portfolio selection problems were discussed
S. Wang is with the Department of School of Economics and Management, based on different optimization criteria. For instance, in [26],
University of Chinese Academy of Sciences, Beijing 100049, China (e-mail: except for return and variance, the authors discussed a number
B. Wang is with the Department of School of Management and Engineering, of other objectives in portfolio selection, such as dividends,
Nanjing University, Nanjing 210093, China (e-mail: liquidity, social responsibility, amount of short selling, and
J. Watada is with the Graduate School of Information, Production and
Systems, Waseda University, Kitakyushu 808-0135, Japan (e-mail: junzow@ so forth, based on a nonstandard investor theory. In addition, more technical multiobjective portfolio optimization models,
Color versions of one or more of the figures in this paper are available online such as possibilistic model [10], expected value model [8],
Digital Object Identifier 10.1109/TFUZZ.2016.2582906 chance-constrained model [19], and VaR model [29], were

1063-6706 © 2016 IEEE. Personal use is permitted, but republication/redistribution requires IEEE permission.
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ment i is assigned a profit target τi according to the profitability methodologies. i ∈ [1 : M ]. of the department. how to model the overall investment problem II. and due to the the resulting intrinsic decision dynamics in the investment pro. and [34]. and higher allocated. most existing studies his/her risk tolerance level. most recently. This problem captures a general (MILP) problem. we have to Finally. Since the exactly be on the ambiguity of the manager’s risk tolerance and realistic RTC is neither convex nor concave. such integer program (MIP) solvers (e. 2. θ̃i . structured problem solv. MODELING RISK TOLERANCE AMBIGUITY to capture the dynamics. we develop IG techniques (as an exten- problem: the first-stage corresponds to the budget decision. which results in cumbersome computa. with the budget mation granules (e... It behaves as lection decision yi ) based on the distributional information (ξi ) a complementary and dependent triangle: structured thinking of the asset returns. department while controlling the shortfall risk (with respect to ing within the methodological perspective. to select the portfolio that benefits most in his utility. distribution. and different estimates for it can output different re. perform the portfolio investment (with portfolio se- order uncertainties) in complex problem solving.364 IEEE TRANSACTIONS ON FUZZY SYSTEMS. MOSEK [1]. investment problem. denoted computational perspective. random variables. the adap- get allocation depends on the investment performance (return) tive robust granular budget-portfolio optimization model is de- of each manager. to model a more realistic investment process. In addition. [36] were also considered to obtain more realistic results. few has investigated the risk attitude or perception The ambiguous RTCs embedded with the fuzzy set RNBT can ambiguity issues in investment and portfolio optimization from then be constructed. we also harness the IG techniques to the single-period portfolio models were extended to multiperiod restructure the human-centric ambiguity information (fuzzy set dynamic situations (see [6] and [36]). NO. We consider a general budget-portfolio investment problem: 3) The RTC. related studies. a few. [33]. to maximize the investment return of the within the philosophical perspective. we introduce the concept of risk-neutral budget threshold return-risk tradeoffs of the security returns’ information and (RNBT) and use fuzzy set granule to represent its ambiguity. Furthermore. The computational study is provided in Section VI. veloped. and tools that make use of infor. and structured in. These approaches techniques of granular computing have been applied success- can output a Pareto-optimal solution set that balances the fully to deal with the uncertainty restructuring and represen- conflict objectives. project investment. target τi ) under some tolerance level. 1) Holistically. we show that the developed model corresponds to that each manager conducts the portfolio selec. tional issues. Each investment depart- work. Due to the risk tolerance ambiguity of each investment Section II introduces the problem background and discusses the manager. In this paper. which can be regarded as an unadjustable (once implemented) As an advanced structured information processing frame. To handle such a dynamic investment system. can be transformed into a mixed integer linear programming tion with the budget assigned. and the second-stage investment linearization techniques. in Section V. the IG by νi (xi . In Section III-C. fuzzy sets. investors are able to reallocate their capital to tolerance ambiguity. Γi ). and the portfolio selection conducted of the terminal wealth. in general. and MATLAB 2015). The investment managers. making use of the integer programming agers of different departments. to name The remainder of this paper is organized as follows. turns. which well captures the manager’s risk- the behaviorial finance perspective. the concluding remarks are drawn in Section VII. the an RTC certainly cannot be precisely known by the investment model extension on robustizing the probability estimations is principal. a two-stage adaptive optimization model each candidate securities at the beginning of each subperiod of is developed. and the final decision is made by maximizing the managers is the first-stage decision that is made before knowing utility function of the expected value and the risk measurements each manager’s real RTC. in sion of the IG used in [32]) to restructure the fuzzy informa- which the principal allocates the budget to the investment man. modeling of risk tolerance ambiguity. In particular. CPLEX [9]. To model the risk tolerance ambi- in investment and portfolio optimization focus on the risk and/or guity. the resulting model essentially is cess. existence of the ambiguity. and some other related recent studies can be found in [24]. and general financial portfolio investment outsourcing. IBM-ILOG- as budget allocation within the corporation. techniques. by each manager is the second-stage decision that is adapted to As briefed in the above literature review. tion of RNBTs. The budget allocation to the different investment the investment. some elements granules) of manager’s risk tolerance in the budget-portfolio such as transaction costs [18] and bankruptcy possibility [5]. Then. cate to each investment managers (departments) i. Problem Description the manager is ambiguous. decision during the budgeting horizon. Granular Computing (see [22] and [35]) covers theories. and from which the decision maker is able tation for optimization under integrated uncertainty (see [32]). we consider a two-stage investment To solve the model. which can be handled by off-the-shelf mixed investment decision pattern in many practical applications. In this study. In To capture the decision-making dynamics driven by the risk these approaches. Section IV discusses the MIP formulation of the model erance curve (RTC) (risk-averse or risk-seeking attitude). APRIL 2017 developed with uncertain security returns. resolve the following issues. the whole system becomes highly dynamic: The bud. formation processing [information granulation (IG)] within the Each investment manager has its own risk tolerance. 25. which depends on the manager’s ambiguous . Such and its Benders decomposition. This apparently has not been attempted by any of the above a nonconvex adaptive optimization problem under uncertainty. Specifically. then how to model it. has a nonconvex shape (to be showed The investment principal decides how much budget xi to allo- in Section II-B).g. our focus will averse or risk-seeking attitude in a realistic manner. discussed.g. 2) The RTC that reflects the inner psychological activities of A. which is largely influenced by his/her risk tol. VOL. In addition.

1. age) become larger and larger. the RNBT and reservation budget together can reflect and more risk seeking (respectively. such as the historical RTA-1: If budget allocation is greater than the RNBT level. which is able to cap- [see Fig. which largely tude and activities. Γi ) bases the following two steps. on the budget surplus is perturbed slightly around the reservation the flap side. Mathematically. the psychological survey to the manager. (a) RTC νi (xi . and its estima- Identification of Risk Tolerance Attitude (RTA): tion needs to consider a variety of factors. Specifically. ture and incorporate the vague or imprecise human-centric risk RTA-3: When the budget is less than the RNBT level (pos. θi .g. Γi ). θi . Therefore. the RNBT of a risk-averse manager is relatively level. θi . θ̃i . while any budget shortfall will increase his The above risk attitude dynamics are natural for the budget al- tendency in risk aversion. it shows that attitudes for the investment managers when the budgets xi ’s νi (xi .WANG et al. the tolerance νi (xi . Constructing Ambiguous Risk Tolerance Curve To model the RTC of each manager. Here. then the risk attitude of the manager will also change high. the more the budget shortage is. We emphasize here that it is exactly the deep-seated ambi- guity in the managers’ risk tolerances νi (xi . fuzzy set whose value varies within an interval [θia . attitudes of the managers. inspired by the reference point effect in the behavioral finance (see [11] and [27]). in this study. so as to maximize the overall budget-portfolio investment performance? This is the Fig. Γ i ) is convex when xi ≥ θi and νi (xi . 2(a)]. risk averse). Our RNBT model is νi− (xi . the more the budget surplus is. this maps to a concave risk aver. collectively the individual’s (psychological) risk-seeking atti. due to the ambiguous psychological activities. but his reservation budget could be very high. play a central role in our adaptive budget-portfolio in- vestment problem. characterized. psychologically. personality). he has more room for risk seeking. itive surplus). Γ i ) is concave when xi < θi . Γ i ) = νi+ (xi . if a manager is highly risk seeking. The RTA-2 and RTA-3 jointly indicate essentially that if words. i ∈ [1 : M ] that creates the dynamics (adaptivity) of decision making and. can be identified in the based on the following identifications: following aspects: On the one hand. Step 1: For each i ∈ [1 : M ]. This human-centric “ambiguity” in the manager’s risk tolerance could influence significantly the total investment performance (return) and risk control. seeking preference. the true RNBT of each manager cannot be precisely known in practice. Γ i ) when θi varies between [θia . θi . but could be dif- ferent from the suggested one Γi (in terms of risk management guidance) and is not known exactly by the investment principal. department. decision behavior of the manager. if the investment manager location under risk: the RTA-1 simply follows from the common is risk seeking. θi . If the budget surplus (respectively. On the flap side. faster the (marginal) risk aversion utility increases. θic ]. Γ i ) = allocated deviate from their RNBT θi s. budget short- RNBT is low. therefore. this maps to a convex risk-seeking therefore.: ADAPTIVE BUDGET-PORTFOLIO INVESTMENT OPTIMIZATION UNDER RISK TOLERANCE AMBIGUITY 365 RNBT θ̃i (to be introduced in Section II-B) and the budget allocation xi given the basic risk tolerance Γi . a question arises for the in- vestment principal: How to realistically and effectively model the ambiguous risk tolerance of each investment manager and incorporate it into the investment model. 2. we model the RNBT θ̃i as a Mathematically. the managers’ risk attitudes are affects the budget-portfolio investment. then possible human-centric information (e. our approach builds on the utilization utility function when budget surplus is positive of fuzzy set granules (see [21] and [35]). Example of membership function of fuzzy RNBT θ̃i estimated for the major concern of this study. the RNBT of each investment manager is defined as the reference budget point of the manager that any sion utility function when budget shortage is positive budget surplus (to that reference point) will increase his risk. 2(a)]. we start with the fol- lowing basic consideration of the risk preference and aversion Fig. Specifically. and other if the budget allocated is less than the RNBT. ith manager. his RNBT level is relatively lower. On the manager is inclined to be risk averse. his accordingly. The RNBT is different from the concept of reservation slightly in either directions of risk preference or risk aversion budget: For instance.. θ̃i . the transaction data of the the manager is apt to be risk seeking. The construction of ambiguous RTC is elab- orated on in Section II-B. the Noting that the risk tolerance ambiguity of each investment faster the (marginal) risk-seeking utility increases. the construction of risk itive shortage). Hence. The overall adaptive budget-portfolio model equipped with the constructed ambiguous RTC will then be developed in Section III. the manager will become more Actually. other hand. θic ] ⊂ + . The ambiguity of the manager’s risk tolerance. in other sense. (b) Illustration of RTC νi (xi . [see Fig. the risk-seeking/averse utilities cannot be precisely RTA-2: When the budget is greater than the RNBT level (pos. Γ i ) for a given RNBT θi . manager results mainly from the human psychological activities. B. θi .

. θi . otherwise Gi (xi . i. the portfolio θ̃i by decision remains unchanged within this transaction period. θ̃i .. with tion that approximates the risk-averse utility shape described in the collective RNBTs θ = (θ1 . xi ≥ θi νi (xi . θ̃i ) is the optimal expected return of the second-stage adaptive portfolio selection process conducted by the invest- where both νi+ (xi . θi ) adapts to θi and solves a mean- with ij > 0. we define the fol.t. i ∈ [1 : M ]) in the θ̃iα := x ∈  : θ̃i (x) ≥ α = θ̃iα . APRIL 2017 (see Fig. θi . θ2 . θ̃iα . which corresponds a membership grade αi ∈ [0. max M Gi (xi . Γi ) := max d+ ij (xi − θi ) + hij + (4) j =1 see also [32]) of the fuzzy set granules θ̃i . the first-stage problem B(α) := θ̃1α ⊗ θ̃2α ⊗ . the value function Gi (xi . 25.366 IEEE TRANSACTIONS ON FUZZY SYSTEMS. Γi ) and νi− (xi . hij ∈  being constant entries [see Fig. i ∈ [1 : M ]. Furthermore. and νi− (xi . J   In the second stage. θi . More precisely. given νi− (xi . the constraint (7) with νi+(θi . Γi ) := (3) where δ ∈ (0. νi+ (xi .     Due to the existence of the ambiguity (θ̃i . and in particular. Γi ) . θi . VOL. we denote the α-level set (α-cut) of of the portfolio section problem. the budget-portfolio investment problem is essentially a two-stage adaptive op- and denote by timization problem. ∀θ ∈ B(δ) (8)  i=1 νi+ (xi . θi . we model the resulting ambiguous risk tolerance i=1 function νi (xi . whose functional structure is defined as  s. and each νi− (xi . where “⊗” is the direct product operator. . i. θ̃i ). . θi . . Finally. θ̃i .e. .L . 1). Γi ). . and entries. which will be introduced in Section III-C. Γi ) is a piecewise linear concave func- the constraint (8) requires that the total risk tolerance. Γi ) = Γi and d+ + ij > 0. Γi ) are nondecreasing ment manager i given the budget allocation xi and the manager’s in xi . 2(a)]. hij ∈  being constant is the common regularity requirement of the total budget. and the specific operation of M[·] J   depends on the IG treatment (to be discussed in Section III-B. θi . Moreover. θM ) varying within the RTA-3. i ∈ [1 : M ]. risk portfolio selection subproblem as follows: . θ̃2 . In other words. νi+ (xi . Γi ) ≤ Γtotal . Γi ) := min d− − ij (xi − θi ) + hij (5) j =1 any allocated budge xi and the outcome value θi of fuzzy RNBT νi− (θi .e. Γi ) is a piecewise linear (fuzzy) RNBT θ̃i . NO. θic ]. θi . cannot exceed Γtotal . . θ̃i ) (6) x Step 2: Then. θi . . x ∈ M (7) + follows: For each realized value θi of θ̃i with θi ∈ [θia . 1 x = 1. . Γi ). Γi ) = Γi and d− − θ̃i . . Γi ) . 1].U (1) risk tolerances νi (xi .. θi . 1]. θ̃M ) . θi . 2. product δ-level set B(δ). M lowing RTC according to the above RTAs 1–3: νi (xi . M[·] is a robust granular mean op- convex function that approximates the risk-seeking utility shape erator that averages the worst-case second-stage adaptive fuzzy described in RTA-2. for each department i ∈ [1 : M ]. optimal returns Gi (xi . θi . B(δ) is the δ-cut given by (2). ⊗ θ̃M α (2) corresponds to the budget allocation M the product α-level set of multidimensional fuzzy set θ̃ = (θ̃1 .

θi ) := max E ξ i yi (9) department i results in a collection of RTCs νi (xi . Γi ) corresponds to a mem- bership grade μθ̃ i (θi ) = αi . In a nutshell. Fig.t. Γi ). θic ]. and each curve νi (xi . 1 yi = xi (10) . θι ∈ N y i ∈+ i [θia . θi . θi . 2 provides the illustration s. the ambiguous RNBT θ̃i for each investment Gi (xi .

Γi ) (11) III. Formulating Adaptive Budget-Portfolio Investment Problem In particular. ADAPTIVE ROBUST GRANULAR BUDGET-PORTFOLIO where constraint (10) requires the investment capital to be MODEL capped by the budget allocation xi . and constraint (11) ensures the risk level being controlled under the tolerance νi (xi . CV@Rβ τi − ξ i yi ≤ νi (xi . and τi is i with significance level β ∈ [0. θi . A. of RTCs. Γi ). whose formula is the profit target of the investment manager i. Γi is the basic   . θi . 1]. ξ i is random return vector of CVaR (see [7] and [23]) of the profit target shortfall τi − ξ i yi asset portfolio for the manager i with ξ i (ω) ∈ N + . the risk criterion CV@Rβ [τi − ξ i yi ] utilized is the Notation: Index i ∈ [1 : M ].

 1 .

given the basic risk tolerance level Γi . we just present the model that variable x ∈ M + is the budget allocation to investment man. θ̃i is the ambiguous RNBT of manager i modeled by a fuzzy set. here. xi ]. which computes the expected shortfall the ambiguous risk tolerance of manager i. manager i. θ̃i . Γi ) is where [·]+ = max{·. many other constraints can be added for different imple- decision of the investment manager i for i ∈ [1 : M ]. mentation purposes and situations.  + risk tolerance level suggested for department i. and νi (xi . 0}. and Γtotal is the CV@Rβ τi − ξ i yi = inf λ + E τi − ξ i yi − λ λ β total risk tolerance level for all departments. The decision For the generality sake. which is influenced conditional of the shortfall being exceeding its 100(1 − β)%- by the budget allocation xi for manager i and the RNBT θ̃i of quantile (see [23]). and yi ∈ N + is the portfolio selection i ment. 2) We consider one transaction period [1 : M ] and/or add some risk tolerance priority weights before . For example. i ∈ manager is ambiguous. captures the major characteristics of the budget-portfolio invest- agers from the principal. the decision + Basic Assumptions: 1) The risk tolerance of each investment maker can add the budget allocation bounds xi ∈ [x− i .

65] = {θ̃i0 \ θ̃i0. Information Granulation of the Fuzzy Set Risk-Neutral Budget Threshold θ̃ where symbol “−→” means “being restructured into.381. and Δ1 = α1 should paper. Fig. φ1i = 0. to handle issue 1. φ2i = 0. ι ∈ [0. = βi := 2 α  φi 0.4 \ θ̃i0. 3. 1 = . which are discussed in Section IV. union of intervals) Mιi . Illustration of the partition of the support [0. the formulated two-stage adaptive budget- portfolio model can realistically capture the human-centric be- havior (RTAs 1–3) and ambiguity (via fuzzy set granule) in the individual risk tolerance.8 . φ3i .65] of fuzzy set granule RNBT θ̃i . . i ∈ [1 : M ] given in (3) by the (see Example 1).WANG et al.: ADAPTIVE BUDGET-PORTFOLIO INVESTMENT OPTIMIZATION UNDER RISK TOLERANCE AMBIGUITY 367 each νi (xi . to achieve a good estimation. ι .286. there are several critical modeling and computational issues that need to be handled: 1) Note that the RNBT θ̃i could be of various types of shapes (membership functions of fuzzy set granule) depending on the different implementation requirements. 3]}. which range [0. Here. θi . such that θ̃i0 = [0.2 φ0i where θ̃i N + 1 := ∅. the membership grade realistic requirement is neither convex nor concave. ture (decompose) θ̃i into a series of tractable units (intervals) Example 1: In Fig. which may incur some perturbations under the condition that N ι=0 φi = 1.4 φ1i φi : 3 = .8 . Nevertheless. where βi is ι ι to the model. < αN < 1.4 } ∪ 1) Given a series of membership grades 0 = α0 < α1 < {θ̃i0. φ1i .6 \ θ̃i0. 0. the fuzzy set granule RNBT θ̃i is restructured and titioned into subsets (with each being an interval or a transferred into {Mιi .6 . we do the following.6 φi 0. θ̃ic ] of ated subjective probabilities φi = (φ0i . Γi ). ι ∈ [0 : N ].0476. φi ≥ 0. φ3i = 0. M3i = θ̃i0. Thus.4 \ θ̃i0.2 \ θ̃i0. an IG approach is developed in Section III-B be very close to each other. however. N ]} will be utilized to de- and robust manner. and θ̃iα 0 := [θ̃ia . θ̃ic ] = N ι=0 Mi (see ι Fig. especially in our two-stage dynamic setting.8 φ3i 0. Specifically. computing directly the RNBT θ̃i in M[·] could be difficult.4 φi 0.6 φ2i 0. that unit set. by the fuzzy set θ̃i into estimation constraints αι + 1 Mιi := θ̃iα ι \ θ̃i . φ2i . as well as the decision dynamics (via adaptive modeling) induced by the ambiguity. .8 } ∪ θ̃i0.4 . the support [0. Mιi ∩ Mκi = ∅. the associ- α2 < . Γi ). φ0i = 0. These add-ons. M4i = θ̃i0. and φ4i = Note that the support θ̃ia .2. M2i = θ̃i0. In other words.0952. ι ∈ [0.0. 1] should be evenly or almost evenly partitioned also creates a heavy computational burden onto the model. φιi . φιi .   θ̃i −→ Mιi . θ̃ic for each i has been par.2 \ θ̃i0. issue 3 can θ̃i . M1i = timates the subjective probability of the true RNBT falling into θ̃i0. ι ∈ [0. φιi .” and Mιi . ι ∈ [0 : N ] (12) φ4i 0. will not affect the tractability structure of our modeling. ity. i ∈ [1 : M ] 3) The RTC νi (xi . Finally. ι ∈ [0. ι ∈ [2 : N ]. the restruc- In order to utilize the fuzzy set information of θ̃i in a tractable tured information {Mιi .8 . 3 and Example 1). which es- granule RNBT θ̃i is partitioned into M0i = θ̃i0 \ θ̃i0.6 } ∪ {θ̃i0.2 } ∪ {θ̃i0. i ∈ [1 : M ] is restructured (decomposed) into the following be well handled by the MILP transformation and a Benders pairs of units and subjective probabilities: decomposition algorithm.2. we partition the support [θ̃ia . Furthermore. each fuzzy set granule RNBT operator M[·] specified in Section III-C. N ] B.190. It is clear that (13) uniquely determines φi . θi . with φ0i + φ1i + φ2i + φ3i = 1.2. φιi ≥ 0 can be determined: 2) We estimate the subjective  probability  φιi for each Mιi . the differ- All these issues can be well tackled in order in the remaining ences Δι = αι − αι−1 . empirically. 2) The RNBT θ̃i as an estimate of general fuzzy set granule is  uncertainty in nature. N ] are given by (12). 2 = . In Section III-C. Specifically. φ4i ) .65] of fuzzy set and associate each unit with a corresponding weight.2 . This calls for a mechanism of perturbation the input that controls the tails of the subjective probabil- resistance in the model. we extend the IG method in [32] and restruc- fine granular robust mean operator M[·]. As mentioned. 3. Therefore. 0.6 \ θ̃i0. 0. Issue 2 is resolved by robust granular mean After the above IG process.

Especially. In fact. it is natural to estimate the subjective proba. our bility φιi for each Mιi from the membership grades. when the φιi αι φ1i probability robustizing model (see Section V) is used. we nonconvex fuzzy set RNBT. here. . There IG approach developed in Section III-B does not rely on the are many approaches of determining the (subjective) prob. ι ∈ [2 : N ]. for modeling RNBT can be of a general shape. Therefore. convexity of RNBT and can also handle smoothly the general ability values from a fuzzy set (see [3] and [32]). the effect φi : = . just use the following relative regulation approach: Remark 2: The IG approach is also flexible enough to uti- lize other probability estimation methods. = βi (13) φι−1 i αι−1 φ0i of probability estimation inaccuracy can be well hedged against.= Remark 1: We point out that the fuzzy set granule θ̃i used κ.

25. . θi ) := φ min Gi (xi . φιi . by not- robust granular budget-portfolio model (6)–(11) with the ing from (1) that θ̃iδ. θi ) of the second-stage port- folio selection performance Gi (xi . APRIL 2017 C. ι). In particular.U . and the second-stage CV@R portfolio optimization problem: constraints (11) are expanded into the form (21). ι ∈ [0 : N ]. i ∈ [1 : M ] (21) mance for Gi (xi . has been converted into (19) with each yiι being the adaptive Proposition 1: If ambiguity in the risk tolerance vanishes. x ∈ M + .  With the robust granular mean objective function M[·] in (14) By Proposition 2. VOL. i ∈ [1 : M ]. i ι ∈ [0 : N ]. θ̃M ):   1  k  ι M N K θ̃i −→ Mιi .U . . our adaptive robust granular budget-portfolio model with ambiguity (6)–(11) has been transformed equiva- model (6)–(11) has been fully developed. i ∈ [1 : M ]. λ ∈ . NO. lently into a single deterministic mathematical programming In the following. .   ≤ νi xi . 1 yiι = xi . k ∈ [1 : K]. . the total risk tolerance constraints (8) has been con- reduces to the following single-stage stochastic mean-risk verted into a single constraint (20).t.U and θ̃iα ι . i ∈ [1 : M ] maxι φιi ξ̂ i yi (19) x. ι ∈ [0 : N ] are stochastic mean-risk portfolio model. θ̃i ) over the corresponding yiι ∈ N + . Proof: The proof details are provided in the Appendix. ι (24) tive probability coefficient φιi to achieve the overall mean robust performance. i ∈ [1 : M ] (23) unit Mιi is computed and multiplied by the associated subjec. i ∈ [1 : M ] (22) bust) estimation minθ i ∈Mιi Gi (xi . θ̃iα ι .U . which is formalized as crisp values. based on the restructured information of RNBT θ̃. for each (i. 2. The robust operator minθ i ∈Mιi Gi (xi . νi xi . the two-stage adaptive budget-portfolio being established. the robust granular mean objective the following result. Robust Granular Mean Operator and Model Variants average approximation formulation: On the leverage of the IG of RNBT θ̃ = (θ̃i . In fact.368 IEEE TRANSACTIONS ON FUZZY SYSTEMS. Γi . (14) ι i=1 i θ i ∈Mιi K  + i=1 i=1 ι=0 1  k  The robust granular mean operator (14) as the objective function λ + ι τi − ξ̂ i yi − λ ι ι βK in adaptive budget-portfolio model (6)–(11) essentially pursues k =1 the optimal total mean of the “robustized” investment perfor. N ] . Γi ≤ Γtotal (20) M ˜ Gi (xi . . portfolio selection decision that is robust to the perturbation of the two-stage budget-portfolio optimization problem (6)–(11) θi ∈ Mιi .y K i=1 ι=0 k =1 we can define the robust granular mean operator M[·] as follows: M M   M N   s. ι ∈ [0. we draw the connection of our adaptive k (19)–(24) with asset return data inputs ξ̂ . θ̃2 . θ̃i ). 1 x = 1. ι ∈ [0 : N ]. θ̃iδ. the worst-case (ro. θi ) used here is able to immunize the decision to the perturbation of θ˜i . θi ) . ι ∈ [0 : N ].

. 1 y = 1.U . Γi ). y2 . M νi (1 yi . θ̃iα ι . y = (y1 . . θ̃iδ.U . Γi ) and s. .t. yM  ) ∈ N + 1 +···+N M (16) νi (xi . max E ξ  y (15) Now. which will be resolved in the next section. . θ̄i . the remaining key issue is the optimization re- y lated to the nonconvex nonconcave RTCs νi (xi . Γi ) ≤ Γtotal (17) i=1 IV. MIXED INTEGER LINEAR PROGRAM APPROACH .

 (21) intractable. In the following. k Proposition 2: Given the asset return data ξ̂ . θi . siιj . Mixed Integer Linear Programming Formulation i ∈ [1 : M ]. we can transformed into the linear systems (26)–(31) and (32)–(35). which makes both constraint systems (20) and Proof: The proof details are provided in the Appendix. ∀ι. given the asset return data ξ̂ .. respectively. in the MILP (25)–(39). Γi ) is neither convex nor concave. i. k convex constraints (20) and (21) in model (19)–(24) have been Finally.. k ∈ [1 : K]. A. k ∈ [1 : K]. the problem in formulation (19)– Proposition 1 implies that when the risk tolerance ambigu- (24) cannot be directly solved efficiently. IBM-ILOG-CPLEX [9]. we show that the problem (19)–(24) can be equivalently mization problem that maximizes the total expected profit. θ̄i . us- ity vanishes. MOSEK [1]. binaries zij . derive a more computable formulation for the adaptive budget. In particular. CV@Rβ τi − ξ i yi ≤ νi (1 yi . by Proposition 3. the non- constraint (18). Therefore. (17) and caps the target shortfall risk of each department though and MATLAB 2015). (18) Note that each RTC function νi (xi . controls the total risk tolerance by constraint shelf MIP solvers (e. Γi ).e.g. 1}. j. κiι ∈ {0. i. by introducing auxiliary portfolio model (6)–(11). the two-stage budget-portfolio problem reduces to ing the linearization techniques of MIP modeling (see [4] and a standard (single-stage) stochastic multiagent portfolio opti- [20]). Proposition 3: The sample average approximation problem the model (6)–(11) can be expressed as the following sample (19)–(24) can be equivalently transformed into the following . transformed into a MILP that can be well handled by the off-the- objective (15). πi .

1}. s. s. z.x ∈ M + . z. It bears noting that in the above derived model (25)– UB = max γ : n ∈ [1 : N 0 ] (42) (39). {(γ. s. π. n ∈ [1 : N 0 ] ∪ D̂ ⊆ V. π. Solving this upper- the size of binary variables is O(M × N × J). ⎬ and [20]).: ADAPTIVE BUDGET-PORTFOLIO INVESTMENT OPTIMIZATION UNDER RISK TOLERANCE AMBIGUITY 369 MILP: K. s. and the number J of M N 1 k  maxι φιi ξ̂ i yiι (25) the linear segments in the RTC. the inner minimization problem  k  ι ηik ≥ τi − ξ̂ i yiι − λι . κ) continuous decision variables is O(M × N × K). s.U + κiι B. and therefore. Clearly.s. k i (38) duality is equivalent to its dual problem (25)–(38).WANG et al.t. i (31) linear subproblem (25)–(38) with dual variables being denoted   by D.y K (M. κ) : (39)}. π. ∀ι. and η ∈ (N +1) × M × K are D∈P auxiliary continuous decision variables. κ) are the linear objective function and polyhe- dral feasible set. can solve efficiently the LP subproblem (41) which by the strong yiι ∈ N + . the derived linear MIP model M (25)–(39) is actually a scalable one. Hence. and κ ∈ {0. j (30) given (z. z. π. π. s. κ) (40) λι + ηik ≤ d− α ι . z. κiι ∈ {0. i (34) some vertex D ∈ V of polyhedron P. of the dual problem to the original xi ≤ θ̃iα ι . π.  per bound UB can then be obtained by solving a relatively It is known that it is the number of integer variables that dom. the max–min j =1 problem (40) can be equivalently represented in the following formulation: θ̃iα ι . π. κ). s.κ)∈S  1x=1 (37) which is termed the master problem in the context of Benders decomposition.κ)∈S D∈P βK k =1 where S := {(z. i. a lower bound can be formed zij . ∀i. ∀ι. Therefore. ∀i (29) the problem (25)–(39) can be represented into the following j =1 max–min formulation: 1 ι K   max min K(D. κ) and P + h− ij + κiι B. λ ∈ (N +1) . κ)}. where γ ∈ M . πi . i=1   γi + (1 − πi )B ≥ d+ij xi − θ̃ δ. ∀ι.s. z. 1}M × (N +1) × J .π. s. we γi . ∀ι. κ) ∈ S. κ) ∈ S that makes the objective value of the original k =1 problem (25)–(39) finite. s ∈ {0. Therefore. Furthermore. π. which largely circumvents s. j (39)   LB = max LB. siιj . by noting   that the sample size K ≥ N and K ≥ Ni . s. 1}M × (N +1) On the other hand. ∀ι. are controllable. j (28) solution can be found within a finite number of iterations. π. n ∈ [1 : |V|] 1 yiι = xi .U utilize Benders decomposition method (see [20]) to handle its large-scale version in an iterative manner. ∀i ∈ [1 : M ]. In practice.ηik ι ∈ + . min K(D. κ) ∈ S. π ∈ {0. γ ≤ K(D n . κ) ∈  × S : γ ≤ K(D̂. which can be input back into . and B is a sufficiently ing the subproblem (41). and J) compared with K are of small sizes and. z. π. ∀ι. ∀ι. j (32) ij D. s. and K(D. κ). j (27) B. we can form a cut: Π(D̂) := large positive number. π. π. J First. with the vertex D̂ ∈ V obtained by solv- are auxiliary binary decision variables. z. s.s.U i + h+ ij . π. N . i. i.λι ∈ . z. n ∈ [1 : |V|]} . Given any effective βK (z. there- i=1 ι=0 k =1 fore. respectively.U ij xi − θ̃i (z. and the exact optimal + h− ij + (1 − zij )B. by the strong duality of linear programming (LP) theory. but only depends on the number M of departments. s. given any binaries (z. κ) . the size of constraints is O(M × N × K).π. s. and where D n . κ) is affine in + h+ + (1 − siιj )B + (1 − κiι )B. and an up- Proof: The proof details are given in the Appendix. the size of (z. i (36) (z.κ)∈S ⎩ ⎭ γ ≤ K(D̂. z ∈ {0. ∀ι. the bound relaxed master problem can provide us with an improved number of binaries is independent of the asset return data size feasible binaries (z.U ij xi − θ̃i is a finite set V := {D n . we denote by V the vertices set of P which 1 ι K λι + ηik ≤ d+ α ι . π. number K  N of decomposition units of RNBT θ̃. 1}M . small scale relaxed master MIP problem: ⎧ ⎫ inates the complexity of the linear MIP computations (see [4] ⎨ γ ≤ K(D n . zij ≥ 1. z. ∀i. ∀ι.U ≤ xi + (1 − κiι )B. s. z. the structure of MILP (25)–(39) allows us to γi + πi B ≥ d−ij xi − θ̃i δ.π. i. i.t. γi ≤ Γtotal (26) the computational burden from data size. k (33) min K(D. κ) (41) D∈P J which serves as an LP subproblem reaches its optimality at siιj ≥ 1. note that K(D. s. i (35)   max γ : s. π. all these numbers x. Benders Decomposition Algorithm   Furthermore. 1}I × J .

i (49) V.1 and use the where = [ιi ](N +1) × M ≥ 0 is the parameter that controls the following exponential utility shapes to model the primitive perturbation range. φ̂M ) is the tion can also be smoothly applied to handle the extended subjective probabilities estimated by (13). VOL.. ∀ι.y i=1 ι=0 ι=0 vertices set V. . 3. Repeating the above K]. we additional auxiliary variables. tended model (47)–(50). The detailed securities are listed in Table I. θi ) (44) x φ∈Υ() θ i ∈Mi i=1 ι=0 s. The following proposition shows that the extended model (44)–(46) preserves the computationally beneficial MILP formulation. . Υ( ) := φ : φ̂ι − ι ≤ φι ≤ φ̂ι + ι . 2014 to Dec. we can then model (47)–(50). it is clearly that both LB and UB maxι ti + (φ̂i + i )di + ι ι ι (φ̂i − i )bi (47) ι ι ι improves along the iterations. and Γi [2 − eb i ( θ̃ i −x i ) ] otherwise. x ∈ M + (45) M νi (xi . k Proposition 4: Given the asset return data ξ̂ .t. φ̂2 . COMPUTATIONAL STUDY A. crisp RNBTs. biguous RNBTs. . risk tolerance function for each department: νi (xi . Therefore. i ∈ [1 : M ] ⎪ ⎪ ⎨ ι=0 i ⎬ termines the asset portfolio from ten securities. 1 x = 1. APRIL 2017 The resulting extended model formally writes as follows: M N   max min φιi min ι Gi (xi . the am- the perturbation in the estimation of subjective probabilities.  perturbation in the subjective probability vector φ. assume that φ̂ := (φ̂1 . k ∈ [1 : K](K = 252) of each manager i are collected from the New York Stock Exchange (Jan. robust granular mean operator M[·] defined by (14). Γi ) := Furthermore. which further hedges against averse levels (curvatures). Each department manager de- ⎪ ⎪ φ ι = 1. may need to further immunize the model against the estimation Proof: See the Appendix for the proof details. we point out that the structure of MILP (25)–(39) we develop an estimation perturbation set in this section for φ that derives the Benders decomposition in Section IV-B is and further extend the developed model (6)–(11) by robustizing also preserved in the constraint system (26)–(39) of the ex- the subjective probabilities over the perturbation set. d ∈ − and b ∈ . we can which is piecewisely linearized into the form of (4)–(5). 1. A set of real securities data for one year ⎪ ⎪ i i i i i ⎪ ⎪ ⎪ ⎩ ⎪ ⎭ k ι ∈ [0 : N ]. i = 1. M = 3. . NO. 2. dιi ∈ − . .t.370 IEEE TRANSACTIONS ON FUZZY SYSTEMS. bιi ∈ + . and due to the finiteness of the x. Γi ) ≤ Γtotal i=1 ∀θ = (θ1 . θi . which can be summarized as Algorithm 1. are the + ities in Section III-B could be of some “errors”. To this end. MODEL EXTENSION: ROBUSTIZING THE PROBABILITY ESTIMATES (26)–(39) (50) (N +1)×M (N +1)×M It should be noted that the estimation of subjective probabil. where arrive at an extended version of the adaptive robust granular parameters ai > 0 and bi > 0 control the risk-seeking and risk- budget-portfolio model (6)–(11). applying the perturbation set (43) to the Γi ea i (x i −θ̃ i ) when xi ≥ θi . 31. .e. 2. where t ∈ M . Finally. We set the CV@R significant level β = 0. . the profit targets. respectively. i ∈ [1 : M ] ξ̂ i . θi ) is the second-stage (optimal) value function that solves the adaptive portfolio selection subproblem (9)–(11). the Benders decomposi- Specifically. and the basic . Furthermore. following MILP: anism. k s. 25. construct the following estimation perturbation set for the subjective probabilities: VI. 2014). therefore. . (43) Ni = 10. ∀ι. Data and Parameters Setting ⎧ ⎫ We consider a budget-portfolio optimization problem with ⎪ N ⎪ three investment departments. the exact optimality (LB = UB) can be reached K  1  within finite steps of iterations. k ∈ [1 : the subproblem (41) to obtain the next D̂. M N N From the above discussion. the extended model (44)–(46) is equivalent to the process forms an iterative relaxation and cut-generation mech. i. θM ) ∈B(δ) (46) where each Gi (xi . i (48) K k =1 ti ∈ . θ̃i . ti + dιi + bιi ≤ ξ̂ i yiι .

the manager intends to add more low-risk in capturing the ambiguity averse effects and the insights securities (usually also with low returns) to reduce the total risk (see Section VI-C).27.34.19. 0.3.43. since the budget allocations and the basic risk toler- ance levels are relatively larger.39] FCX −0.02. 1.10 [−0. 0. and i=1 (51) −0.50) 0. θ̃ i θi τi Γi returns 0.30] YUM −0.30 0.26 and 0. We set ai = bi = 0. and we set the “confidence level” 1 − δ = 0. θ2 .20 0. from Depts 1 and 3 to Dept 2. tolerance control mechanism (51). 9 securities in 3) Performance comparisons of different models the list selected by department 2.13] ZMH 0. 2. risk averse. and the subjective probabilities φιi .03 [−0.35.04 [−0. when both the basic risk tolerance level and the in capturing the managers’ risk tolerance effects as well budget allocation are small.WANG et al.07.675 > 0. we for Dept 1 drops sharply by 0.59. 0.16] QIHU 0. i =] ACH 0.25 which is much worse than −0. 0.44 [−0.20. the investment in which case the managers have crisp RTCs.8%. No. 0.44.25) 0. 0.675−0.19] BAC 0. 3.2 < · · · < α9 = 0. In sum of the above risk conditions.05 [−0. i. 2.02 [−0.40] WDAY 0.25 of “HAL” νi (xi . Recall that the Γtotal = 0. 2) The portfolio selection of The computational experiments are divided into three parts. 0. 4.13.01 [− < α2 = reasonably chooses to put more budget to “DANG” (Dept 1) 0.37] YGE −0. PROFIT TARGETS. . Specifically. respectively.22] YHOO −0.04 [−0. As for Dept 1. If we look back at the initial base scenario change when managers become more and more risk seeking. θi .01 [−0. this is due to the total risk (13).24 0.1). Such assume that the RNBTs have crisp values. 0. 0. .06 [−0.143 0.8 for risk is controlled by CV@R0.19.32. 2. 2. not all 0. On the other hand. The total risk tolerance potential reason is the risk control requirement.07] ZTS 0. 0.09.23 [−0. . 0.: ADAPTIVE BUDGET-PORTFOLIO INVESTMENT OPTIMIZATION UNDER RISK TOLERANCE AMBIGUITY 371 TABLE I SECURITIES RETURN INFORMATION FOR EACH INVESTMENT DEPARTMENT Department 1 Department 2 Department 3 Security Mean (return) Range (return) Security Mean Range Security Mean Range PFE −0. 0. 0.42] KORS 0.20. No. and No.40) 0. 0.26 [−0. 8. 0.23] JCP −0. 0.03] CNTF −0.04 [−0. 2 (0. 0. definitely already violates this.45 0.01 [−0.09 [−0. Γi ) ≤ Γtotal ∀θ = (θ1 .25] HAL 0.07 [−0.14. θ̃i ≡ θi . we partition its support the tolerance.04 [−0. 0.02 [−0. more budget is shifted We first investigate the reduced stochastic model (15)–(18). which corresponds to a smaller νi value (risk tol- 2) To demonstrate the effectiveness of the proposed models erance). CRISP RNBTS.24] DIS 0.08] DB −0. 0.45. the model allocates more budget to Dept 1 than Dept 3. Investment Next.46] DANG 0.06] KMI 0.06 [−0.18.25. securi- ties “DANG” (of Dept 1) and “HAL” (of Dept 3) have expected Manager No. increase.21. Therefore. where βi ≡ 2. budget investment evolution reflects the insights on how the RTC that is. the manager is inclined to be more as the managerial insights (see Section VI-B). 1.675 × 100% = 78. which justifies AMBIGUOUS RNBTS.10] JNPR 0. No.11 of “DANG.11 > −0.72] CNQ 0. 0. . 0.19] YELP 0.1 as the base with RNBT drives the risk control decision: It is clear that for scenario and.16 0.41.” 3 and the basic risk tolerance Γ3 = 0. the risk-seeking level increases very fast when the and 0.08 3 (0.13 [−0. only Dept 1 is at the risk-seeking region by noting The solution profile is presented in Table III.04 [−0. i = 1.11 [−0. 0. of the portfolio. 3.23] TABLE II We first look at the base scenario (ai = 0. ι = than to “HAL” (Dept 3) to control the risk. then.16.37. Furthermore. 0. 0. we essentially require worst-case potential loss. 0.30. can be calibrated by using the estimation formula the budget is assigned to Dept 1 or 3. as given in Table II.15. when αi .21 the resulting budget allocations to Depts 1 and 3 (investments to these securities) are relatively larger than Dept 2.16 [−0.15. 0. for each fuzzy RNBT θ̃i in Table II.1. 0.10] AXP −0. Dept 2 is more diversified compared with Depts 1 and 3. the managers then have more tolerance to centralize their investment to the security with high B.05.01 [−0. 0.05. The risk tolerance levels are given in Table II.e.08. 3.14. which is essentially the near the total risk tolerance constraint. and in particular. i = 1.12.14 [−0. i = 1. increase the risk-seeking level ai to 0. to see how the budget-portfolio decisions budget increases.23] HTZ −0. 0.37] HON 0.03 [−0. 0.14 fore. for Depts (see Section VI-D).12.11. 9. . 0.2).23] BK 0. Therefore. 0. ai = 0. 2.19] JNJ 0.12] CHL 0. driven by the objective of expected return maximization.30 = θ1 .44.07.95] KRA −0.44 that are much higher than the others. that x1 = 0.02 [−0. 0.2 a high αi . Note that the worst potential loss of “HAL” is −0.14.1 . 3.13 [−0..32. the model into N = 9 parts with membership grades α1 = 0. Γ1 = 0. 1 and 3. The 1) To demonstrate the effectiveness of the proposed models reason is that. the risk level of “DANG” is under Here. therefore. there- 1 (0. Capturing the Risk Tolerance Effect in Budget-Portfolio expected return (also high risk). when αi . that is. AND BASIC RISK TOLERANCE LEVELS the effectiveness of our proposed (reduced) stochastic portfolio model with RNBT (see Proposition 1): 1) By Table I.48] JPM −0. In addition. θ3 ) ∈ B(0. 0. but −0.09 0. 0.02 [−0. 0.10 [−0.

and the other two remain crisp values. comes large.675 to 0. 0. 0. Hence. 9. the risk-seeking region due to its lowest basic risk tolerance and the solution is presented in Table IV.265 TABLE IV It should be noted that the portfolio selections in the adap- SOLUTION COMPARISON OF NONAMBIGUITY BUDGET MODEL AND AMBIGUITY BUDGET MODEL tive budget-portfolio investment problem are the second-stage operations.4). 0. 0. 2.365 > C.381) interestingly provides a very rational decision under the We solve this specified adaptive budget investment model via complicated ambiguity: the model chooses Dept 2 to stay in MILP (25)–(39) for the base scenario ai = bi = 0.023.184).250 without ambiguity. 0) Optimal total return 0.25 > θ̃2α ι .3. Therefore. reasonable decision as the model has made is to drag the budget of the θ̃1 is used in the computation and all of them are larger level for Dept 1 down from the risk-seeking state to that of risk than the mode 0.272 pare the budget allocations for the different models with and Fuzzy-Crisp RNBTs ( θ̃ 1 . ν1 . Finally.372 IEEE TRANSACTIONS ON FUZZY SYSTEMS. 0.363 0. ple is not sure about his manager’s risk tolerance (behavior).” trols the managers’ risk attitudes: recall again that the right- hand side endpoints θ̃iα ι . is actually Crisp RNBTs (θ 1 . ι = 0. 0. Hence. 0. . 0. .002. 9. 0.381 0.. which provides larger room (compared with Dept 3) conservative or prudent investment for this “uncertain” Dept.256 < 0.483.30. From crisp RNBTs (θ1 .U . ι = 0. θ 3 ) Dept. θ̃ 3 ) are given in Table II).265.195 Portfolio selection (0. 0. of each θ̃i are uti- lized in computation. . 0. θ3 ). therefore.40).085 0.3 < θ̃1α ι . 0. more capital will be invested to budget for Dept 2 increases rationally from 0. 0) (0. ι = 0.256. Because the Dept 2 has the tion policy also results in a decreased total return (from 0. VOL.374. .261. 3. Such a conservative budget alloca- budget to Dept 2 than Dept 3. Therefore. ι = 0.064. 0. the sit- tolerance also gets increased.20. 0. 0. 0. 9.08) which can scale down to 0. 0.204 Portfolio selection (0. The insight here is that if the investment princi- the actual risk tolerance (ν2 ) even when the budget x2 be.321 0. that is why the total return decreases a little from captured by our model. The reason is that we utilize the robust granular are increased to 0. θ2 . 0. NO. from 0. 0) (0.248 crisp RNBTs (θ̃1 .079 0. θ 3 ) Budget allocation 0. 0) Optimal total return 0.666.116. .1. we only need to com- Budget allocation 0. 0.184 Risk level (CV@R) 0. 0. 0. 0. since their basic tolerance .483. as listed in Table IV (where all the θ̃i s. x2 = 0. θ2 . 0. 0. and the real decision. 1. the portfolio now is uation becomes more complicated.2. and note in Table IV that x2 = 0. 1. . 0. 0. recall that the securities for Dept 2 have relatively This effect on ambiguity is important and has been well low returns. 0. 1. .U . .141 to 0. we can still allowed to be more centralized to the high-return (high-risk) dig out some insights on how the investment principal con- security “CNQ. However.237. 0. With the increased budget.143. therefore. we can observe that the budget allo- cation to Dept 1 decreases when its RNBT changes from 0.483 0. . 0. 0) (0. .143 0. .272 a i = 0. . 0. the tainty and the right-hand side endpoints θ̃1α ι . level 0. 9. We now set the RNBT of Dept 1 a triangular fuzzy set granule The budget allocation policy (x1 = 0.479 0. 1. 1. 0.184 0.U .1 Department 1 Department 2 Department 3 Budget allocation 0.U .3. 0. APRIL 2017 TABLE III SOLUTION PROFILE OF STOCHASTIC MODEL (15)–(18) WITH INCREASING RISK-SEEKING LEVEL a i = 0. 0) (0.267 a i = 0. 0) 0. 0.3 to (0. 0.675 0. θ3 ) to fuzzy- Budget allocation 0.0. 0) (0. 0.256 0. θi s Fuzzy RNBTs ( θ̃ 1 . 0.261 Risk level (CV@R) 0. .08. 0. (0. 0. 0.076 0.203 Portfolio selection (0. 0.321. 0. rather naturally. 0. 0. 3 Return the budget investment decision.358 0.001.250). 0.142 0. . . 0. 0. 0. .001. 0. 0. 0.374 Risk level (CV@R) 0. 0. when all the RNBTs are ambiguous. 0. 25.008. 0.414.260 0. 0.675 0. . 0) Optimal total return 0.321 0. 0. 0. which results in a more conservative RTC aversion (i. 0.184. .143). the manager’s risk Furthermore.130 0. the Therefore. 0.3 Budget allocation 0. 0.141 0.009.3. which are adaptive to different realizations of am- biguous RNBTs θ̃i s. 1 Dept.381 < 0. x1 = 0.2 Budget allocation 0. and x3 = 0.e.45 < θ̃3α ι . 0.365. θ̃ 2 . 0. the Depts whose managers’s behaviors are more predictable. the model reasonably chooses to shift more down from 0. θ 2 . 0.272 to 0. the budget investment level for Dept 1 is pulled Furthermore. 0. 2. ι = Investment 0. . 0. 0. 0. 0. 0. i = 1.675 down to 0. 0. 9. θ 2 .145 0. x3 = θ̃1 = (0. while for Depts 1 and 3.272 lowest basic risk tolerance (only 0. .U . 0. 0. Dept 1 could easily violate the total risk approach in the ambiguity model to hedge against the uncer- tolerance if its budget allocation stays unchanged.141 0. 0. and its initial investment is also very low (only it is safer for him to make robust decisions and perform a 0. for increasing the budget investment for Dept 2. 0. Capturing the Ambiguity-Averse Effect in Budget-Portfolio 0. 0. 0.013. 2 Dept. 0.

for any (θ1 . . . 4. we draw 100 different RNBT points from the supports of different individuals (managers).08% higher than the pro. which reflects the average value of the manager i becomes precise. θM ) ∈ B(δ). istic manner the risk tolerance behaviors with ambiguity of the i=1 i=1 i=1 . . By the direct calculation on the results in APPENDIX Fig. 2. [28]. 2. Out-of-Sample Performance Comparisons in the risk tolerance utility for describing the managers’ risk- averse and/or risk-seeking attitudes. 1]. The proposed ro. . and in are sensitive to the different risk tolerance levels (curvatures) each set.14 and 0. This well justifies the high robust level of our robust granular model. the model. averagely. the second decomposition in an iterative manner. 2) Higher robustness. respectively). but also can well adapt and tion 2). and then. and is termed conventional model. θi . The concept of RNBT modeled by a fuzzy set granule was proposed. δ ∈ (0. M stochastic model. and the that the model can not only capture the effects of managers’ third one is the proposed robust granular model (see Proposi. θ̃i ≡ θ̄i . Γi ). 4(c)] of the expected returns. show that the model can effectively and “wisely” realize the spective budget designs. The resulting adaptive robust granu- ager’s RTC or the ambiguity. we can compute ent ambiguity levels. and bust granular model reduces the average St. three expected return values ambiguity-averse decisions and is also sensitive to the differ- can be obtained [see Fig. investment managers. model is the proposed stochastic model with tolerance curve yet By testing the proposed model with crisp RNBTs. θ̄i ). 4 demonstrate clearly the advantages of the proposed models: 1) Higher av- erage performance. The out-of-sample tests are divided into ten sets. Furthermore. by testing the of θ̃i for each department i = 1. (c) Comparison in standard deviation across different sets of experiments. by 77. We then have B(δ) ≡ (θ̄1 . ∀δ ∈ (0. M ˜ Gi (xi . which plays a pivotal role D. On the other hand. The comparative results presented in Fig. θ̄2 .WANG et al. [30]). [25].. the out-of-sample comparisons the average expected returns [see Fig. performance and robustness. . we point is plugged into the RTC of the stochastic model with re. which is able to capture in a real. Γi ) ≡ νi (xi . . .97% higher than the conventional Proof of Proposition 1 model.94% and 53. see Fig. the expected return of the proposed robust granular model is 16.. θ̄i . . θi . (b) Comparison in average expected return across different sets of experiments.13% compared with the conventional model and the proposed νi (xi . Finally. and each generated RNBT proposed robust granular model with ambiguous RNBTs.g. 1]. 4(a)]. and tractable modeling. We utilized IG techniques Finally. vanishes. . i ∈ [1 : M ].D. we perform the out-of-sample tests to compare the to restructure and robustize the fuzzy set RNBTs and devel- performances of three different models: the first model is the oped a robust granular mean operator so as to achieve a robust budget-portfolio model without considering either the man. M M M portfolio optimization model. levels are much higher (0. by the risk tolerance ambiguity. θ̄M ) . 4(b) and (c). the estimated subjective probability φi ≡ 1. keeps them in the risk-averse states. value. with θ̄i being a crisp ambiguity information. (a) Comparison in expected return values across testing scenarios (partial). CONCLUDING REMARKS This paper developed an adaptive robust granular budget. the risk tolerance utility function of each investment posed stochastic model. as well as the decision dynamics induced therefore. Γi ) is replaced by the constant bench. we show without considering the ambiguity (see Proposition 1). Out-of-sample performance comparisons of three models. which is based on the conventional lar budget-portfolio model can be equivalently transformed into static mean-risk mechanism (e. which well reflects the average joint information value It is not difficult to see that when risk tolerance ambiguity of the RNBT and ambiguity and is 4.: ADAPTIVE BUDGET-PORTFOLIO INVESTMENT OPTIMIZATION UNDER RISK TOLERANCE AMBIGUITY 373 Fig. RTC onto the investment process. Furthermore. θi ) = M Gi (xi . θ̄i ) = Gi (xi . that is. 3. and its large-scale version can be handled by Benders mark value Γi . 4(b)] and standard devi. θ2 . where each a MILP. and VII. . .21. i = 1. . respectively.D. which can be solved efficiently by off-the-shelf MIP tolerance curve νi (xi . solvers. demonstrate the advantages of our proposed models in average ation [St.

θ̄i ) solves subproblem (9)–(11) for i ∈ [1 : M ]. VOL. the overall problem (6)–(11) reduces to . 2. NO.374 IEEE TRANSACTIONS ON FUZZY SYSTEMS. and therefore Therefore. APRIL 2017 where Gi (xi . 25.

t. M min ι Gi (xi . yiι ∈ N + i . 1 yiι = xi . θi ) = max E ξ i yiι θ i ∈Mi ιyi  max E ξ i yi x i=1 s.

s. Γi . Γi ) ≤ Γtotal ≤ νi xi . maxι θi . θ̄i .t. θ i ∈Mi i=1 . 1 x = 1. x ∈ M + CV@Rβ τi − ξ i yiι   M νi (xi .

∀ i. recall that B(δ) := θ̃1δ ⊗ θ̃2δ ⊗ . CV@Rβ τi − ξ i yi ≤ νi (xi . can also be (6)–(8). . Γi ) . (53) νi xi . k ∈ [1 : K]. Γi ) ≤ Γtotal . θi . and we are   done. . . . 2. where   Gi (xi . Γi ) := max d+ + ij (xi − Δ − θi ) + hij value function formulation minθ i ∈Mιi Gi (xi . θi . i ∈ [1 : M ]. Γi . . maxι θi . . we have for Δ > 0 that Plugging back the transformed constraint (52) for (8) of the first-stage problem and the above transformed robust J   νi+ (xi .U = yi ∈ N  maxθ i ∈Mιi θi .U . νi (xi .U ij xi − θ̃i we have ij .U θ i ∈Mi Proof of Proposition 2 k We first consider constraint (8) in the first-stage problem which with the return samples ξ̂ . we can also have νi− (xi . Γi ) := minj =1 {dij (xi − θi ) + hij } are nonde- J creasing functions of xi . i. we linearize constraint (20). otherwise θ i ∈Mi θ i ∈Mi j =1 . Γi ) .U . θ̃iδ. i form: This leads directly to the claimed form (15)–(18). We then can have constraint (8) δ in the first-stage problem (6)–(8) to be equivalent to M   M   γi ≤ Γtotal . . − − − νi (xi . i ∈ [1 : M ] α Recall that Mιi = θ̃iα ι \ θ̃i ι + 1 . Γi . Hence. (52) i=1 i=1 Recall from definitions (3)–(5) that Next. θ̃i ]. θi + Δ. 1 yiι = xi . Γi ) := 1 νi− (xi . νi xi . θi . Γi ) ≤ νi− (xi . Γi ) := maxJj=1 {d+ + ij (xi − θi ) + hij } and ≤ νi xi . θi . . Γi ) ≤ νi+ (xi .U . ι ∈ [0 : N ]. Γi ) is nonincreasing in θi Proof of Proposition 3 for each i = 1. θi + Δ.. for each ι = 0. Γi ij xi − θ̃i ij . θi . θi . θi ). otherwise λι + τi − ξ̂ i yiι − λι βK k =1   and νi+ (xi . First. . θ̄i . yiι ∈ N i +  νi+ (xi . . Γi ≤ Γtotal . .  min ι Gi (xi . θ̃iα ι . θi ) solves the portfolio selection subproblem (9)–(11). θ̃iα ι . θ̃iδ.U + h− min ι νi (xi . expressed as the following form: M 1 k  ι K νi (xi . θ̃iδ.U + h+ xi ≥ θ̃iδ. ⊗ θ̃M δ . θi . 1 yi = xi .U where each θ̃i = [θ̃i . θi . To this end. Therefore. . we have θ̃iα ι . ι ∈ [0 : N ]. N .L δ.e. θi . θ2 . γi ≥ νi xi . Γi ) . .  Similarly. Γi ) in θi again. Γi ). θi . Γi ).t. θi . xi ≥ θi K   k  + νi (xi . Γi By the nonincreasing monotonicity of νi (xi . θi ) = Gi xi . j =1 we can arrive at the claimed formulation (19)–(24) for the orig- = νi+ (xi − Δ. it as the following equivalent form: δ. . M .   := j J=1   ⎪ ⎩ min d− δ. θi ) for ι ∈ [0 : N ]. ∀θ = (θ1 . Γi ) = νi xi . θM ) ∈ B(δ). we can then arrive at the following + . θi . 1.U . we consider the robus- tized second-stage value function minθ i ∈Mιi Gi (xi . ⎧   ⎪ J ⎨ max d+ δ. max (ξ̂ i ) yi i=1 ι yi K k =1 Recall that s. inal model (6)–(11). we reformulate On the other hand.

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” J. 43. degrees from the Gradu- Design. pp.. Fuzzy Syst. Information rization for classifier performance improvement. 7121–7131. neering from Southeast University. Wang. He was a Special Research Fellow of the Japan Society for the Promotion of Science.Sc. vol. no. tracking systems. vol. in 2004 and 2007. Information and Control. 23. Shuming Wang received the B.” IEEE Trans. Sato and M. Wang.Sc. APRIL 2017 [20] G. Wang and W. Japan. 2011. ety for the Promotion of Science. FL. Control. “Analysis of spatiotem. pp.-M. [32] S. no. and risk assessment and management. USA: MIT Press. 20. pp. Cambridge. Vasilakos. He is the Principal Editor. and H. AND CYBERNET- ICS: SYSTEMS.Sc. USA: CRC Press. at-risk.. Watada. 1997. China. Wang. and Journal of Global Optimization.376 IEEE TRANSACTIONS ON FUZZY SYSTEMS. Japan. H. Japan. Uryasev. GH Asachi Medal from Universitatea Tehnica GH Asachi. sity. Tversky and D. MA. Aamir.” IEEE Trans. IASI. vol. Pedrycz. He has also served as a referee for several international journals. degrees in electrical engineering from Osaka City pp.” Tatra Mountains Math.” Expert Syst. L. 2006. vol. May 2014. E. and A. Japan (2009–2011). Since March 2016. 5. Ltd. and M. IEEE TRANSACTIONS ON CYBERNETICS. NJ. Pedrycz. 2004. and worked as a Research Fel- low with the National University of Singapore.Sc. “Multiple objectives in portfolio selection. he was a Professor of Eng. pp. 2013. Baoding. 4. knowledge engi- ing. Pedrycz. Financial Decision Making. Sakai. and W. Osaka. A. 44. no. and an Associate Editor [34] X. (HQ). 2000. University. Watada is a Life Fellow of the Japan Society for Fuzzy Theory and proach for optimization under integrated uncertainty. Inter- vol. Program. Wang. 11–26. Japan. no. NO. Mar. 29. Boca Raton. in press. [36] S. respectively. Singapore (2012–2015). Pedrycz. Rockafellar and S. Fuzzy Syst. . 4. R. 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He [24] M. Science and Technology. His research interests include portfolio selection projects with critical risks. Autom. Y. de- grees in applied mathematics from Hebei Univer- sity. Publ. vol.. 25. and soft computing with the Graduate School of In- els with value-at-risk. 2. 1998. “Fuzzy portfolio selection and its application to decision mak. vol. and metaheuristic algorithms. 2015. vol. W. Yao. 297–323. fuzzy set theory. Annals of Operations Research. Fuzzy Intelligent Informatics and the Biomedical Fuzzy System Association. Song. Waseda Univer- pp. Integer and Combinatorial Optimiza. 42. He is the Syst. Nanjing. [27] A. soft computing. no. 1. 620–635. “Optimization of conditional value. T. He received [33] X. Wolsey. 21–41. [26] R. vol. An Introduction to Fuzzy Sets: Analysis and and the M. International Journal of Production Research. 2013. degree from [29] B. Nemhauser and L. power system planning. and Fuzzy [35] J. he has been an Assistant Professor with the School of Economics and Management. IMechE). He has also been an Adjunct Researcher with Waseda University since 2011. “Fuzziness based sample catego. USA: Wiley. 19. Hoboken. 2005.-M. and M. Watada. pp.D. and the Ph. “Granular computing: Optimization and Decision Making. China (2011–2012). Beijing. “Fuzzy portfolio selection mod. His research interests include [31] J. 758–769. Risk.