Portfolio Selection Using Fuzzy Mean-Variance Approach

Portfolio selection issue continuously gaining an interest among scholars. The portfolioʹs ability to maximize the diversification benefit for investors becomes main focus of portfolio management. Portfolio selection model ability to solve uncertainty issue in investing is a key in deriving a new and robust model. Previous studies show that there are many factors that influence the portfolioʹs diversification benefit. In this paper, we utilized a fuzzy approach to innovate the expected assetʹs return variable in the mean-variance model. The model was derived by adopting the idea in Markowitz[15] (mean-variance model) and Vercher, Bermudez & Segura[24] (VBS fuzzy model). The fuzzy mean-variance model was used to construct 139 efficient portfolios based on the large and small market capitalization. The portfolios performances were examined using efficient frontier index (EFI) in the whole period of study, in rising, sideway and falling stock market trends. As a result, empirical evidence of the model revealed that the new model able to maximize portfolioʹs diversification benefit especially in the falling market trend outperformed the conventional mean-variance and the VBS fuzzy model