Joumal ofthe Operational Research Society (1996) 47, 1377-1386 © 1996 Operational Research Society Ltd.

d. All rights reserved 0160-5682/96$12.00 ~

Portfolio Selection: A Compromise Programming

Solution
ENRIQUE BALLESTERO and CARLOS ROMERO
Technical University of Madrid, Spain

A surrogate for an investor's hi-criteria utility function (profitability, safety) is proposed as an alternative
methodology for selecting portfolios. The optimum is approximated by resorting to a recent utility theorem
expounded in multi-criteria analysis. This method is developed for an 'average' investor and could be used
as a routine procedure by investment consultants with incomplete information of the client's utility
function.

Key words: multi-criteria analysis, portfolio selection, utility

INTRODUCTION

The method of Markowitz 1•2 •3 , Freund4 and Pratts for selecting investments (in particular security
portfolios) is made up of two different phases: (i) Determining the investment opportunity set as a
constraint of the problem, by resorting to the mean-variance (E-V) efficient frontier. This is a well-
known but restrictive procedure (see Kroll et a/. 6 ) and (ii) Maximizing the expected utility of returns
Eu(R) for the investor on the frontier.
The first phase does not represent serious difficulties. Indeed the E-V efficient set can be easily
approximated by resorting to mathematical programming techniques. The second phase however is full of
conceptual and operational difficulties. As Levy and Markowitz7 have noted, the exact choice of the
efficient portfolio which maximizes Eu(R) is only possible if the returns from all securities are normally
distributed, or if the utility function u(R) is quadratic. But the normal distribution of returns is only a
hypothesis which has not been empirically corroborated and quadratic utility functions present many
logical flaws (for example their absolute risk aversion increases with wealth: see Pratts and Arrows
among others).
Some analysts have undertaken a cumbersome approach comparing the solutions obtained from the
Eu(R) maximization problems for a sample ofutility functions (see Markowitz3 , p. 67). These researchers
attempt to clarify whether or not the theoretical objections to the Eu(R) approach are less damaging in
practice. Kallberg and Ziemba9 show that 'similar' portfolios can be obtained using a variety of utility
functions with different forms and parameters providing that they have the same Arrow's absolute risk
aversion coefficients.
In this paper, we offer an alternative framework to the Eu(R) approach. Our model differs from the
Eu(R) maximization problem in the following points: (a) we start with the 'average' investor's hi-criteria
utility function u((} 1 , (}2 ), where (} 1 is a profit index of the investment, and (}2 a safety index (opposite to
risk); (b) we only need one assumption which is closely related to the well-known MRS (marginal rate of
substitution) law; (c) we approximate the problem: max u((} 1 , (}2 ) subject to the E-V efficient set, for an
'average' investor within a context of incomplete information on u and (d) for this purpose, a surrogate of
Langrangean optimization is used.

Correspondence: C. Romero, E.T.S. lngenieros de Montes, Catedra de Economia, Avda. Complutense, sjn, 28040 Madrid,
Spain

Operational Research Society is collaborating with JSTOR to digitize, preserve, and extend access to
Journal of the Operational Research Society. ®
www.jstor.org
1378 journal of the Operational Research Society Vol. 47, No. II

COMPROMISE PROGRAMMING APPLIED TO THE PORTFOLIO PROBLEM:

SOME PREVIOUS KNOWLEDGE

The portfolio selection problem can be formulated as a hi-criterion problem and can be solved within a
multiple criterion decision-making (MCDM) framework. Using the two criteria of expected returns and
variance of returns, the problem can be reformulated as a compromise programming (CP) problem. This
first step is not new in the literature (see Zeleny 10, pp. 393-394 and Romero et a/. 11 ) but it is a necessary
starting point for our analysis.
We introduce the following notation: E =expected returns on the portfolio; V =variance of returns;
u(E, V) =investor's utility function in the E-V space; E* =anchor or ideal value forE; namely the
maximum expected return compatible with the restraints ofthe problem; V* = anchor or ideal value for V;
namely the minimum variance of return on the portfolio compatible with the restraints of the problem;
E* = anti-ideal value for E, namely the value of E corresponding to the portfolio with a minimum V*
variance; V* =anti-ideal value for V; namely the value of V corresponding to the portfolio with a
maximum E* expectation; y =portfolio mix; Y; =fraction of the portfolio invested in the ith security; F
= set of constraints that the feasible portfolios must fulfil; w 1, w 2 =weights attached to criteria E and V,
respectively; p =metric; namely the parameter defining the family of distance functions; (LI. L 00 ) =best
compromise solutions for metrics p = 1 and p = oo, respectively; they are the bounds of the compromise
set; x; = ith attribute in a CP general context; x; =anchor value for ith attribute in the same context;
p =interest rate; (} 1 =index ofportfolio profitability; (} 2 =index ofportfolio safety; u((} 1 , (}2 ) =investor's
utility function in the ((} 1 , (} 2 ) space; MRS[(} 1 , (} 2 E u = u0 ] =marginal rate of substitution at the point
((}~> (} 2 ) of u = u0 ; namely udu2, where u1 = auj8(} 1 and u2 = au;ae2 .
Define the portfolio selection problem in the form of a CP problem

min LP = [W:lE*- E[P + ~[V- V* [P] 11P

(1)
s.t. yEF

This defines the points and lines shown in Figure 1.

For p = 1 model (1) becomes

max w 1E-w2 V
(2)
s.t. y E F

By solving model (2) the best-compromise portfolio L 1 is obtained. For p = oo only the largest
deviation counts so the distance in equation (1) becomes

max[W1(E* -E), W2 (V- V*)]

Therefore, the L 00 bound is given by

min D =min max[W1(E* -E), W2 (V- V*)]

(3)
s.t. y E F

which is equivalent to (see, for example, Zeleny 12 and Cohon 13 pp. 185-187)

minD
s.t. w 1(E*- E)::::;; D
(4)
wz(V- V*)::::;; D
yEF

Yu 14 proved that L 1 and L 00 are the two bounds of the compromise set on the feasible frontier (in a hi-
criteria space). Solutions defined by other metrics, namely the remaining best-compromise solutions, fall
on the compromise set between L 1 and L 00 • As stated above, bounds (L 1, L 00 ) can be calculated by solving
mathematical programming models (2) and (4). Although, these two non-linear programming models
in the y space could create computational complications, we will show an easier way for determining
(LI. L 00 ) in portfolio problems without resorting to models (2) and (4).
 E. Ballestero and C. Romero-Portfolio Selection: A Compromise Programming Solution 1379

AI. Anll-ldeol portfolio

v (E•, v.) B (E*, v.)
~--------------------------------------------------------------------
1 I
I I
I I
I I
I I
I I
I
I
I
I
0 I
:::i I 1/-\
: ¢1~
...
~
0:: V I
.,.. ! q,-::-
1/-'J.
0
c.

'/ -r
/ :/ '/-'!>
..."':X: ,/ /'
/I
y
<~>""
'~--"
z
0 y ,/ , I <~>""
z , ,/ / ,V
... ' / / /i
0::
:J
/, /
-~ / I
"'0::
...0
/ ' // I
// / / / // I
/ / / I
/ L y' , / // l
"'uz / / /// :
<(
;;;: / w2 Kv-v*)
I
~ I
I
I
I
I
I
l I. Ideal portfolio
I (E*, v*)

EXPECTED RETURN ON THE PORTFOLIO E

FIG. 1. Compromise programming for portfolio selection and graphical determination of the compromise set.

COMPROMISE SET FOR PORTFOLIOS: A GRAPHICAL DETERMINATION

Computing models (2) and (4) can be avoided. Structure (2) is a non-linear model when defined in the
(y) decision variable space, but its objective function is linear when defined in the E-V space. Hence the
objective function of model (2) reaches a maximum at the point of tangency among the family of iso-lines
w 1E- w 2 V = K and the ~V efficient set (see Figure 1). This point of tangency represents the L 1
bound.
The L 00 bound can be found using the following lemma:

Lemma I
The L 00 bound of the compromise set is the point where straight line w1 (x~ - x 1 ) = wix; - x2 )
intercepts the efficient set or attainable frontier (Ballestero and Romero 15).
By changing the attributes (x~> x 2 ) to a portfolio scenario where one of them (the variance) obeys the
'less is better' postulate, the L 00 path can be written
(5)
Hence, once the E-V efficient set has been generated no further mathematical programming models
have to be computed to obtain the compromise set (see Figure 1).

WEIGHTING QUESTION

Weights w 1 and w 2 play the following double role: (a) normalizing the two criteria E-V and (b)
measuring the investor's preferences for expected return and risk (E-V).
Function (a) of the weights can be performed by resorting to any of the normalization methods
proposed in the MCDM field(see Romero 16 , pp. 35--43). As we will show later on, the second function (b)
can be avoided in practice by focusing on the 'average' investor who is assumed to have a standard utility
function. However, for non-average investors, we can only achieve approximations to the utility optimum
1380 Journal of the Operational Research Society Vol. 47, No. II

by resorting to preference weights (see Ballestero and Romero 15). Indeed, estimating preferences by
weights is easier than specifying utility functions. Weighting can be approached through an interactive
MCDM method (see Olson 17 for a review of some ofthese methods). Alternatively, the problem can be
reduced by implementing a sensitivity analysis with the values of the weights.
The weights used here are the standard CP weights; they are not automatically the weights for the
'average' investor. We could use them as a starting point. Hence, we have

w1 v*- v*
-
w2
- E* -E* (6)

In our financial scenario, let us examine the meaning ofweighting this way. Let (E, V) be a point on the
E-V set, and consider the expression
(7)

where M is a given parameter. Suppose we make w1 = 1I p, p being an appropriate interest rate and focus
on w 2 as a discount rate for risk. M can be interpreted as the present value of E after correcting it by a risk
discount factor w2 V. Given a value of M, rates w1 = 1I p and w2 will change as the point (E, V) moves on
the E-V frontier. However, we can determine a pair of shadow rates (or shadow prices) w 1 and w2 which
satisfies:

min [(w 1E-w2 V)-M]

(8)
s.t. (w 1E- w2 V) ?= M

for every point on the E-V frontier. There is a single solution to this problem, the weights given by
equation (6) (Ballestero and Romero 18). Therefore, shadow rates (w 1, w2 ) minimize discrepancies given
by the objective function of model (8) and at the same time ensure that level M is achieved (as the
constraint shows).

AVERAGE INVESTOR'S UTILITY MAXIMIZATION: CP SURROGATE SOLUTION

Let us examine the essential features of utility maximization for a standard (or 'average') investor
whose utility function is virtually unknown. Although CP distance minimization cannot be directly
interpreted as utility optimization, we can show an association between the utility optimum and the
compromise set under certain plausible conditions. Thus, in this sectiop it will be demonstrated that under
normal circumstances, the utility optimum lies on the compromise set.
Consider the following two indices
E-E*
8 1 = Index of profitability = =*--=- (9)
E -E*
v- v* v*- v
82 = Index of safety = 1 - Index of risk = 1 - *- * (10)
v*- v v*- v

Obviously, 0~8 1 ~ 1, 0~82 ~ 1.

With these two normalized indices the ideal point is (87 = 1, (}; = 1) and the anti-ideal is (0,0). (See
Figure 2). We will show that both ideal and anti-ideal (directly derived from the investment opportunity
set) are also related to the 'average' investor's utility map if a plausible condition holds (see below). On
the other hand, the L00 path is the straight line 8 1 = 82 as can be easily checked by substitution. From
equations (9) and (10) and u = u (E,V) the 'average' investor's utility defined in the (8~o 82 ) space
becomes
(11)

Now, consider the following theorem (Ballestero and Romero 15 •19), re-formulated in the portfolio
context:
 E. Ballestero and C. Romero-Portfolio Selection: A Compromise Programming Solution 1381

IDEAL
I. ( 1, 1)

3
u= U 0

2
u= uo
X
UJ
0
z
>- 1
1- u= uo
w
1..&...
<1:
Ill

ATTAINABLE FRONTIER

e,
PROFITABILITY INDEX
FIG. 2. Surrogate solution.

Theorem 1
For portfolios for which 8 1 = 82 , the condition:
MRS(8 1 , 82 E u = u0 ) = 1

is a necessary and sufficient condition guaranteeing that the maximum of the 'average' investor's utility
function u(8 1 , 82 ) lies on the compromise set.
The condition in this theorem can be connected to the well-known law of diminishing marginal rate of
substitution. In scenarios for which 'more is better' (our case for both profitability and safety indices), this
MRS law states that: along an iso-utility curve u = u0

8 1 increasing=> MRS= uJ!u2 decreasing

8 1 decreasing => MRS = u 1 ju 2 increasing

where u 1 and u2 are partial derivatives of u with respect to 8 1 and 82 respectively. In accordance with this
law we assume that the 'average' investor's utility function u(8 1 , 82 ) holds the typical general properties
1382 Journal of the Operational Research Society Vol. 47, No. II

for this kind of function. As the investor is an average individual with balanced preferences, then in
accordance with the MRS law the following structure is suggested

8 1 very high +----+ MRS= u 1ju 2 very low

82 very low +----+ MRS= u2ju 2 very high
8 1 decreasing +----+ MRS= uifu2 increasing
82 increasing +----+ MRS= u2ju 1 decreasing
81 = 82 +----+ MRS= uifu 2 = 1
8 1 decreasing +----+ MRS= uifu2 increasing
82 increasing +----+ MRS= u2ju 1 decreasing
8 1 very low +----+ MRS= uifu 2 very high
82 very high +----+ MRS = u2ju 1 very low

Therefore, we have: 8 1 = 82 -+ MRS= uifu2 = 1 -+condition in the theorem holds-+ Langrangean

maximum of u is a point (8 1 , 82 ) on the compromise set. Thus, CP optimization becomes a good surrogate
for a standard (or 'average') investor's utility.
Although the law of diminishing marginal rate of substitution does not logically imply our assumption
(as far as the udu2 = 1 value is concerned), this conjecture (the only one necessary for underpinning the
CP surrogate solution) seems plausible since we have the following background; the MRS decreases (or
increases) because of the progressive imbalancing of the mix (8 1 , 82 ) (namely because of the increasing
discrepancy between 8 1 and 82 ). Hence, sensu contrario, we can assume that 8 1 = 82 -+ MRS= 1 as a
postulate coherent with the MRS law. To justifY this assertion, let us suppose an analyst asks our
'average' investor: 'If you are in a balanced position with respect to profitability and safety (that is, in a
position 8 1 = 82 ) how many marginal units of safety are you willing to lose to increase your profitability
in one marginal unit?' The analyst can sensibly expect an answer such as: 'one for one' (namely a
marginal unit for a marginal unit) since an 'average' investor who is in a balanced position will probably
prefer to maintain himself as close to his current position as possible. Hence, the analyst would probably
obtain the information IA8 1 1 = IA82 1 when 8 1 = 82. This is equivalent to u 1 = u2 for 8 1 = 82 since
u 1A8 1 + u2 A82 = 0 (12)
on an iso-utility curve. Therefore, the answer from this 'average' investor (in correspondence to an
'average' behaviour) and our basic assumption will generally coincide.
Notice that we do not state a rigid assumption such as: 'the average investor's preferences for the
balanced position 8 1 = 82 are so marked that he will necessarily E:hoose position 8 1 = 82 under any
circumstances'. This would be a restrictive and inflexible assumption, leading the equilibrium to the L 00
point. However, we only assume conservative behaviour when the 'average' individual is in a balanced
position. According to Theorem 1, this conservative behaviour is sufficient to determine that the utility
optimum lies on the compromise set. Thus, points L 1 and L 00 (although derived from technical
information on investment opportunities) can bound the preference arc on the efficient frontier. The
CP model proposed in this paper can be used, by introducing the normalizing weighting given by equation
(6), to approximate solutions for 'average' investors.
Let us finish this section by summarizing the steps needed to implement the portfolio selection
procedure.
(a) Obtain the E-Vefficient set through the traditional technique; (b) Transform the (E,V) space into
the (8 1, 82) space through relationships (9) and (10); note that the ideal point (8~, 8;) is (1 ,1) as Figure 2
shows; (c) Determine point L00 by intercepting 81 = 82 and the efficient set and (d) Determine point L 1 by
solving the program:
(13)
s.t. the solution lies within the efficient set and 81 ;:,: 0, 82 ;:,: 0. Actually this calculation can be avoided
since point L 1 coincides with the point of tangency among the family of iso-lines 81 + 82 = k and the
efficient set. Points between L 1 and L 00 on the efficient set correspond to the surrogate solutions.
An equivalent procedure, without transforming the (E, V) space into the (8 1 , 82 ) space, is the following.
First step, obtain the E-V efficient set (or frontier). Second step, calculate weights using formula (6).
 E. Ballestero and C. Romero-Portfolio Selection: A Compromise Programming Solution 1383

Third step, determine L 1 by model (2). Fourth step, determine L 00 through (4) or by the intersection of
equation (5) and the frontier. As noted above points on the compromise set are the surrogate solutions.

AN ILLUSTRATIVE EXAMPLE

We will illustrate the above procedure by a retrospective portfolio selection problem using four
securities quoted on the Madrid Stock Exchange. The four securities are: Banco de Santander (i = 1),
Banco de Vizcaya (i = 2), Telef6nica (i = 3) and lberduero (i = 4). Table 1 shows the variance-
covariance matrix of returns. Elements on the main diagonal represent the variance for each security.
A last additional column includes the expected returns.

TABLE 1. Variance-covariance matrix (period 1962-1971)

Banco de Banco de Te1ef6nica Iberduero Expected
Santander Vizcaya returns

Banco de Santander 1046.62 242.7 299.04 103.24 35.37

Banco de Vizcaya 242.7 595.47 237.83 51.54 21.54
Te1ef6nica 299.04 237.83 534.26 39.63 18.93
Iberduero 103.24 51.54 39.63 236.53 15.30

First step: Efficient set (or frontier) in the (E,V) space. From the above matrix the following
mathematical programming model is formulated:
max w 1E-w2 V
4 (14)
s.t. LY; = 1, Y; ~ 0 'Vi
i=i
where
E = 35.37y1 + 21.54y2 + 18.93y3 + 15.30y4
v = 1046.62Jii + 595.47Yz + 534.26y~ + 236.53y~
+ 485.4y1y 2 + 598.08y 1y 3 + 206.48y 1y 4 + 475.66yzY3
+ 103.08yzY4 + 79.26Y3Y4
By making w2 = 0 and w1 = 0 alternatively in model (14), the ideal values E* and V* are obtained. By
computing the value of E compatible to the minimum value of V (namely V*) and the value of V
compatible to the maximum value of E (namely E*), the anti-ideal values E* and V* are obtained. These
ideal and anti-ideal values appear in the pay-off matrix (Table 2).

TABLE 2. Pay-off matrix

Expected returns (E) Variance of returns (V)

% %

Expected returns 35.37 (E*) 1046.62 (V*)

Variance of returns 17 (E*) 169.3 (V*)

By applying the NISE method (Cohon et a/. 20) to model (14) the nine extreme efficient points shown in
Table 3 and Figure 3 were obtained. These points can be considered a good approximation to the E-V
frontier. Values of E and V for the extreme effficient points are shown in Table 3.
Second step: Weights. According to formula (6) weights are
35.37- 17
1046.62- 169.3 = 0 "021

Third step: Determining L 1 . The L 1 bound of the compromise set is given by model (2), that is, the
point of tangency between the family of straight lines E - 0.021 V = K and the E-V frontier (Figure 3).
This point of tangency is D.
1384 Journal of the Operational Research Society Vol. 47, No. II

TABLE 3. Extreme efficient portfolios and compromise bounds (L 1 and L 00 )

Extreme points Decision variables Objective functions

Banco de Banco de Telef6nica lberduero Expected Variance

Santander Vizcaya returns of returns
(yl) (y2) (y3) (y4) (E) (V}
% %

0 0.004 0.146 0.201 0.649 17 169.33

A 0.101 0.164 0.161 0.574 18.94 178.19
B 0.251 0.193 0.098 0.458 21.90 223.09
c 0.381 0.218 0.044 0.357 24.47 300.31
D 0.492 0.257 0.251 26.78 401.10
E 0.616 0.260 0.125 29.30 541.88
F 0.739 0.261 31.76 705.77
G 0.859 0.141 33.42 842.91
H 1 35.38 1046.62
Compromise L 1 ~ D 0.492 0.257 0.251 26.78 401.10
bounds L 00 ~ S 0.584 0.238 0.178 28.51 497.68

ANTI-IDEAL
(17 ; 1046.62) H
E-V
£"'CIENT~
1000

/
900

800

..... 700
~
-'
:n
z
;;)

~ 600
0
...u
z
~ 500
~

400

300

0 20 23 26 29 32 35
EXPECTED RETURNS (%)
FIG. 3. Efficient portfolios and compromise set.
 E. Ballestero and C. Romero-Portfolio Selection: A Compromise Programming Solution 1385

Fourth step: Determining L 00 • The L 00 bound will lie on the intersection between the E-V frontier and
the straight line given by equation (5)
35.37 -E v -169.3
= -:-::-.,..-::--:-:::----:-=-::-
-=-::--=-=-~
35.37- 17 1046.62- 169.3
This intersection occurs at pointS (Figure 3). The coordinates of D and S appear at the bottom of
Table 3.

A TENTATIVE COMPARISON OF PROCEDURES

The compromise methodology proposed in this paper and the usual Eu(R) maximization approach
represent different frameworks for the portfolio selection problem and cannot be compared directly.
However, we can compare the numerical results obtained by both procedures in a real context. To
undertake this task we consider the example used by Kroll et a/. 6 with 20 stocks from years 1949-1968.
From this information they obtained a 'mesh' of29 E-Vefficient portfolios with means belonging to the
interval [0.165- 0.303]. Moreover, they selected eight usual utility functions to describe a spectrum of
the investor's behaviour.
In Table 4 the optimum values using Kroll's method and eight utility functions are compared with the
compromise portfolio bounds L 1 and L 00 • A comparison is also made in terms of certainty equivalent.
(See Table 4 where the utility functions are ranked in decreasing order of risk aversion).

TABLE 4. Comparative results based on a case study by Kroll, Levy and Markowitz (1984)
Absolute risk aversion Certainty equivalent
coefficient
Maximum Compromise portfolio For the
Utility Wealth Wealth after utility maximum For the For the
functions before returns returns portfolio L 1 bound L 00 bound utility L1 bound L 00 bound
(1) (2) (3) (4) (5) (6) (7) (8) (9)
-e-x 1 1 0.225 0.073 0.265 0.297 0.277 0.445 0.188 0.222 0.212
ln(x) 1 0.81 0.229 0.084 0.265 0.297 0.277 0.445 0.195 0.222 0.212
XO.l 0.90 0.73 0.231 0.090 0.265 0.297 0.277 0.445 0.198 0.222 0.212
xo.s 0.50 0.40 0.257 0.224 0.265 0.297 0.277 0.445 0.213 0.222 0.212
ln(x + 1) 0.50 0.44 0.247 0.157 0.265 0.297 0.277 0.445 0.212 0.222 0.212
(x + 1)0.1 0.45 0.40 0.257 0.224 0.265 0.297 0.277 0.445 0.212 0.222 0.212
(x + 1)05 0.25 0.22 0.285 0.575 0.265 0.297 0.277 0.445 0.222 0.222 0.212
xo.9 0.10 0.08 0.305 0.962 0.265 0.297 0.277 0.445 0.268 0.222 0.212

Table 4 shows a marked similarity between Kroll's optimum utility portfolios and the compromise
portfolios for the 'average' investor when the Arrow's absolute risk aversion coefficient in Kroll's takes
'non-extreme' values (namely between 0.25 and 0.70). However, this close approximation seems to
vanish when risk aversion takes extreme values (namely 1 or 0.1). These results seem to underpin our
analysis. Indeed, an investor with an extremely high or low risk aversion is really a non-average investor
with a utility function u(0 1, 02 ) which does not comply with the condition underlying Theorem 1, and
consequently his Eu(R) maximum and compromise portfolios can significantly differ. On the contrary,
when we focus on an 'average' investor (namely individuals whose risk aversion coefficients move along
an intermediate range) the utility functions u(OI> 02 ) generally satisfy the condition given by Theorem 1
and the maximum utility portfolios approximate to the best-compromise solutions.

CONCLUSIONS

The compromise surrogate solution seems a sensible alternative to traditional approaches used for
selecting portfolios. First, the proposed methodology requires few assumptions--the main assumption
virtually derived from the MRS law-which seems to be a more plausible scheme than the assumption set
1386 Journal of the Operational Research Society Vol. 47, No. II

required by the standard Eu(R) approaches. Moreover the computing burden is very simple. Once the E-V
efficient frontier has been established, the L 1 and L 00 bounds can be determined graphically.

Acknowledgement-The work by Carlos Romero was supported by the Spanish 'Comision Interministerial de Ciencia y Tecnologia
(CICYT)' under project AGF95-0014 and the 'Junta de Andalucia' (Research Group 2081). Thanks are given to the reviewers for
their helpful suggestions which have greatly improved the presentation and accuracy of the paper. The English editing by Ms.
Christine Mendez is appreciated.

REFERENCES

I. H. M. MARKOWITZ (1952) Portfolio selection. J. Finance 1, 77-91.

2. H. M. MARKOWITZ (1970) Portfolio Selection: Efficient Diversification of Investments. John Wiley & Sons, New York.
3. H. M. MARKOWITZ (1987) Mean-Variance Analysis in Portfolio Choice and Capital Markets. Basil Blackwell, New York.
4. R. J. FREUND (1956) The introduction of risk into a programming model. Econometrica 24, 253-263.
5. J. W. PRATT (1964) Risk aversion in the small and in the large. Econometrica 32, 112-136.
6. Y. KROLL, H. LEVY and H. M. MARKOWITZ (1984) Mean-variance versus direct utility maximization. J Finance 39, 47--61.
7. H. LEVY and H. M. MARKOWITZ (1979) Approximating expected utility by an function of mean and variance. Am. Econ. Rev.
69, 308--317.
8. K. ARRow (1965) Aspects of the Theory of Risk-Bearing. Academic Book Store, Helsinki.
9. J. C. KALLBERG and W. T. ZIEMBA (1983) Comparison of alternative utility functions in portfolio selection problems. Mgmt
Sci. 29, 1257-1276.
10. M. ZELENY (1982) Multiple Criteria Decision Making. McGraw Hill, New York.
II. C. ROMERO, T. REHMAN and J. DOMINGO (1988) Compromise-risk programming for agricultural resource allocation: an
illustration. J. Agric. Econ. 39, 271-276.
12. M. ZELENY (1974) A concept of compromise solutions and the method of the displaced ideal. Camp. Opns Res. 1, 479-496.
13. J. L. COHON (1978) Multiobjective Programming and Planning. Academic Press, New York.
14. P. L. Yu (1973) A class of solutions for group decision problems. Mgmt Sci. 19, 936-946.
15. E. BALLESTERO and C. ROMERO (1991) A theorem connecting utility function optimization and compromise programming.
Opns. Res. Letters 10, 421-427.
16. C. ROMERO (1991) Handbook of Critical Issues in Goal Programming. Pergamon Press, Oxford.
17. D. L. OLSON (1992) Review of empirical studies in multiobjective mathematical programming: subject reflection of nonlinear
utility and learning. Decision Sci. 23, 1-20.
18. E. BALLESTERO and C. ROMERO (1993) Weighting in compromise programming: a theorem on shadow prices. Opns Res.
Letters 13, 325--329.
19. E. BALLESTERO and C. ROMERO (1994) Utility optimization when the utility function is virtually unknown. Theory & Decision
37, 233-243.
20. J. L. COHON, R. L. CHURCH and D. P. SHEER (1979) Generating multiobjective trade-offs: an algorithm for bicriterion
problems. Water Resources Res. 15, 1001-1010.

Received November 1993; accepted May 1996 after four revisions