Investing in real-world equity markets with an AHP-based decision framework

Abstract

A decision framework based on the Analytic Hierarchy Process is presented to evaluate and select equity portfolios under a given investment horizon. It is shown that a hierarchical structure can readily accommodate the complexity and information-computation constraints of this decision problem in real-world stock markets, ranging from a manydimensional investment environment, diverse asset characteristics, individual preferences, perceptions, judgments, expectations, and experience, and multiple qualitative or quantitative criteria. Once the weights obtained from pairwise comparisons in each level of the hierarchy are synthesized with reference to the decision objective, a rationally-determined portfolio emerges through the correspondingly prioritized allocation of equities over a given wealth. Our decision framework offers a flexible and readily applicable addition to the financial practitioner's menu of equity selection techniques, and suggests fruitful extensions to optimize the use of knowledge under bounded rationality and to other areas of asset investment. © 2009 Lavoisier, Paris.