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Lakshay Tomer
Muskan Saluja
Investment Banking Fellow
22 October 2023
“Assessing the Impact of Artificial Intelligence on Investment Portfolio Management: A
Comparative Analysis of AI-Based Decision Support Systems and Traditional Investment
Strategies.”
Artificial intelligence (AI): what is it?
The simulation of human intelligence processes by machines, particularly computer systems,
is known as artificial intelligence. Expert systems, natural language processing, speech
recognition, and machine vision are a few specific uses of AI.
How does it work?
With the increasing hoopla surrounding AI, companies are rushing to highlight the ways in
which their goods and services leverage this technology. Frequently, what is called artificial
intelligence is just a feature of the technology, like machine learning. Machine learning
algorithms must be written and trained on specialized hardware and software, which is a
prerequisite for AI. There isn't just one programming language that works with AI, however,
AI developers tend to use Python, R, Java, C++, and Julia due to their features.
Artificial intelligence (AI) systems typically function by absorbing vast quantities of labeled
training data, examining the data for correlations and patterns, and utilizing these patterns to
forecast future states. In this manner, a chatbot-fed text example can be trained to produce
realistic conversations with humans.’
Why is Artificial Intelligence important?
AI is significant because it has the ability to alter our way of living, working, and playing. It
has been successfully applied in business to automate human labor-intensive processes like
fraud detection, lead generating, quality control, and customer support. AI is far more
efficient than humans at a lot of tasks. AI technologies frequently finish projects fast and with
comparatively few errors, especially when it comes to repetitive, detail-oriented activities like
reviewing a large number of legal papers to verify important fields are filled in appropriately.
AI can provide businesses with previously unknown insights into their operations due to the
vast amounts of data it can handle.
It would not have been easy to conceive of utilizing computer software to connect passengers
to taxis before the current wave of AI. Still, Uber has achieved Fortune 500 status by doing
precisely that.
Many of the biggest and most prosperous businesses in existence today, like Apple,
Microsoft, Alphabet, and Meta, rely heavily on artificial intelligence (AI) to outperform rivals
and streamline operations.
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Let us now understand the impact of Artificial Intelligence on Investment Portfolio

Management:
With the release of ChatGPT-3.5 at the end of last year, interest in artificial intelligence (AI)
has increased dramatically in recent years, both in academic research and in the business
sector. OpenAI's conversational AI system is thrilling investors with a record adoption rate of
100 million users in less than two months(1) and a disturbing ease of access. Since then,
company announcements in this industry have been increasing.
The asset management industry has long been using AI, and while it has advanced rapidly in
recent years, it is still only being used by a small number of key players at this time, primarily
hedge funds, large research offices, management firms that provide quantitative solutions,
and fintech.
The fields of the application are already numerous:
• First, AI can be included into fundamental analysis in portfolio management. Certain
artificial intelligence (AI) techniques are completely compatible with quantitative
management techniques. Machine learning algorithms, for example, can identify
complex non-linear relationships between various variables and detect trends that are
difficult for humans to identify based on large volumes of data that may pertain to the
fundamentals of listed companies, the macroeconomic environment, or the market
environment.In order to produce investment ideas or arbitrage opportunities, the
predictive analysis models produced in this manner are tools for decision-making.
They are designed to anticipate projected returns on various asset classes.

• Another example of how AI is being used in fundamental analysis is textual analysis.

Using a variety of text sources, including corporate earnings reports, press releases
from central banks, and articles, AI techniques using natural language processing can
highlight information that is important to the economy and finance and provide a
quantitative, methodical measure that supports human interpretations.

• AI is also being used in portfolio management through the use of portfolio creation
optimization techniques. Harry Markovitz's contemporary portfolio theory is one
theoretical framework (8). He provided a definition of an efficient portfolio, stating
that the goal is to minimize risk for a given projected return by optimizing the
allocation across the many assets that comprise the portfolio.

• Once more, machine learning finds a home in this domain and can aid in generating
more accurate estimations of the data (correlation matrix, risk, and predicted returns)
utilized in conventional frameworks for portfolio development.

• AI can also offer useful solutions for trading activities, where managing complexity
and speed must be balanced. Algorithmic trading, which is defined as when at least a
piece of the transaction process is automated and currently accounts for a sizable
amount of the number of transactions processed on financial markets, can be made
easier with the usage of AI. During the initial stage, AI can assist in identifying buy or
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sell signals based on a vast amount of market data, namely price trends and traded
volumes, and typically on the basis of technical analysis (as opposed to fundamental
analysis). Subsequently, AI is employed to determine and initiate optimal execution
autonomously.

• The rise of robo-advisor platforms—digital solutions designed to provide a

customized investment consulting service—has also been facilitated by AI. The
general public is becoming more and more interested in these solutions, making it
feasible for them to obtain financial advising services at a reasonable cost. The
algorithms that analyze market data in real time and provide investment suggestions
with the goal of creating an ideal portfolio for a particular client are powered by
artificial intelligence (AI). These recommendations are based on the customer's
objectives regarding return, risk tolerance, and any personal limits. As demonstrated
above, market order execution services are also integrated by robo-advisors.

The opportunities for AI growth in the asset management sector seem limitless, even when it
comes to non-investment-related applications. Even so, it is still challenging to completely
foresee the disruptive power of artificial intelligence (AI), which is likely to give rise to new
fields of application as further innovations arise. We intuitively recognize the potential for
automating specific operations at various stages of the operational chain.
Even while AI has improved productivity and advanced technology, we still need to be
mindful of its drawbacks and the risks it poses for some aspects of portfolio management. To
begin with, the data that powers the learning algorithms is essential to the use of AI and
machine learning approaches.

Finally, considering the complexity of the models employed, one of the difficulties AI-
enabled managers may encounter is interpreting their findings. This is one of the
justifications offered in a report by the European Financial Markets Authority (ESMA) for
the low number of European funds—54 out of 22,000 funds with EU domicile as of the end
of September 2022—that now assert to employ AI in their investment procedures (9).

AI still looks a long way from fully replacing people in the asset management industry today,
where openness, trust, and communication between clients and management experts continue
to be crucial requirements. But AI offers new instruments that may be applied across the
value chain, and whose potential could significantly.
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“Comparative Analysis of AI-Based Decision Support Systems and Traditional Investment

Strategies"
Knowing the advantages and disadvantages of each strategy in the context of financial
decision-making requires a comparison of traditional investment techniques with AI-based
decision-support systems. An outline of the important factors to compare these two methods
is provided below:

❖ Data Processing and Analysis:

1. AI-Based DSS: AI systems are highly adept at swiftly and effectively processing
enormous volumes of data. To find patterns and trends, they can examine both
structured and unstructured data, such as financial reports, social media posts, and
news stories.
2. Traditional Investment Strategies: Traditional techniques frequently depend on
human analysis and historical data. Although they can be useful, they might find it
difficult to process the amount and variety of data that AI systems can.
❖ Predictive Capabilities:
1. AI-Based DSS: Using both real-time and historical data, AI models are able to
forecast future events. With time, machine learning algorithms have the capacity
to adjust and enhance, which could result in more precise predictions.
2. Traditional Investment Strategies: Traditional approaches frequently depend on
fundamental analysis, historical price trends, and heuristics. These may not adjust
to shifting market conditions as rapidly, despite their potential effectiveness.
❖ Risk Management:
1. AI-Based DSS: AI is capable of doing real-time risk assessments and
incorporating intricate risk models. It can support more dynamic risk management
and the creation of diverse portfolios.
2. Traditional Investment Strategies: Traditional techniques could include periodic
portfolio rebalancing and the establishment of predetermined risk thresholds.
❖ Behavioral Analysis:
1. AI-Based DSS: Using behavioral finance concepts, AI can assess the attitudes and
actions of investors. Making better-informed investing selections may be aided by
this.
2. Traditional Investment Strategies: Traditional techniques might not always take
behavioral aspects into account to the same degree as AI does.
❖ Transparency and Interpretability:
1. It can be difficult to interpret a lot of AI models, including deep learning neural
networks. It may not be advantageous to explain investment decisions to
stakeholders or clients when there is a lack of openness.
2. Because they can be founded on accepted reasoning and principles, traditional
strategies are frequently more transparent.
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What is a Decision Support System?

An electronic program used to assist decisions, assessments, and actions within a company or
organization is known as a decision support system (DSS). Massive data sets are sorted
through and analyzed by a DSS, which then compiles detailed information that may be
utilized in decision-making and problem-solving.
Example:
Decision support systems are used in many different industries, including agriculture and
medicine. A medical professional may utilize an automated decision support system for
prescriptions and diagnosis to aid in the diagnosis of a patient. A diagnosis may be made by a
physician with the use of a decision support system that combines clinician inputs with prior
electronic health information.
Exposing Artificial Intelligence and Machine Learning's Impact on Financial Markets: An
Extensive Examination of AI Uses in Trading, Risk Control, and Financial Functions:
Introduction:
Thanks to developments in computing and algorithms, the domains of artificial intelligence
(AI) and machine learning (ML) have had a significant impact on the financial markets. By
improving trade practices and risk management, these technologies are revolutionizing a
number of industries, most notably finance (Chui et al. 2016; Hendershott and Riordan 2013).
The 1980s saw the first uses of AI and ML in the finance industry, and as time went on, these
technologies were used for more complicated tasks including fraud detection and price
predictions (Boukherouaa et al. 2021). Through task automation, personalized services, and
improved decision-making processes, AI and ML are also starting to completely transform
the banking industry.
AI and Machine Learning in Risk Management:
With applications ranging from credit risk assessment to market risk management and
operational risk management, artificial intelligence (AI) and machine learning (ML) in risk
management have sparked a revolutionary change in the financial markets.
The assessment of credit risk is one of the most notable uses of AI and ML in risk management.
Conventional models, which rely on predetermined thresholds and criteria, frequently classify
people into inflexible credit categories, which may result in inaccurate or irrational credit
decisions. However, a more dynamic and adaptable approach is brought about by AI and ML.
To begin with, AI models—particularly those based on deep learning—are capable of
processing a wide range of data kinds, including online activities and transaction histories. This
implies that rather than focusing solely on an individual's income or credit history.
Concerns and Challenges:
Although AI and ML technologies are very promising for the financial markets of the future,
they also bring with them a number of serious issues and difficulties that require careful
consideration.
At the heart of these difficulties are ethical issues. Privacy is still a major concern, particularly
as AI and ML systems frequently depend on large amounts of data to function (Bryson et al.
2017). Concerns about how sensitive data is used and safeguarded become progressively more
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pressing when financial markets employ these technologies more frequently. Fairness is still
another important consideration. AI and ML systems need to be created with care to make sure
they don't reinforce bias or produce unjust results, especially when they are used in decision-
making processes like credit scoring and risk assessments (Jordan).
Results:
This part serves to present the results of our study, offering a thorough and in-depth analysis
of the information acquired using our multi-method research strategy. Our goal is to gain a
comprehensive understanding of the ways in which artificial intelligence (AI) and machine
learning (ML) are impacting financial markets through the analysis of both descriptive and
numerical data. The purpose of this section's structure is to address the introduction's
hypotheses and offer data to support or refute them.
This section will first present the survey respondents' demographic information, which will be
followed by an examination of the numerical data gathered from the survey. The examination
that follows will cover the use and implementation of AI and ML.
So, that’s all from my side of making a report on the impact of AI on Investment Portfolio
Management and the comparative analysis of AI-Based Decision Support System and
Traditional Investment Strategies.

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