COMPARISON OF OPTIMAL PORTFOLIOS SELECTED BY MULTICRITERIAL MODEL USING ABSOLUTE AND RELATIVE CRITERIA VALUES

Abstract

In this paper we select an optimal portfolio on the Croatian capital market by using the multicriterial programming. In accordance
with the modern portfolio theory maximisation of returns at minimal risk should be the investment goal of any successful investor.
However, contrary to the expectations of the modern portfolio theory, the tests carried out on a number of financial markets reveal
the existence of other indicators important in portfolio selection. Considering the importance of variables other than return and
risk, selection of the optimal portfolio becomes a multicriterial problem which should be solved by using the appropriate
techniques.
In order to select an optimal portfolio, absolute values of criteria, like return, risk, price to earning value ratio (P/E), price to book
value ratio (P/B) and price to sale value ratio (P/S) are included in our multicriterial model. However the problem might occur as
the mean values of some criteria are significantly different for different sectors and because financial managers emphasize that
comparison of the same criteria for different sectors could lead us to wrong conclusions. In the second part of the paper, relative
values of previously stated criteria (in relation to mean value of sector) are included in model for selecting optimal portfolio.
Furthermore, the paper shows that if relative values of criteria are included in multicriterial model for selecting optimal portfolio,
the return in the subsequent period is considerably higher than if absolute values of the same criteria were used