A Hierarchical Approach to a Tri-Objective Portfolio Optimization Problem Considering an ESG Index

Traditional portfolio construction primarily revolves around a bi-objective approach, focusing on minimizing portfolio variance while maximizing expected returns. However, this approach leaves out other objectives that could interest decision makers. In this work, we incorporate an extra objective, namely the environmental, social, and governance index (ESG), as a secondary objective. This addition empowers investors to customize their portfolios by defining explicit trade-off thresholds between expected returns and risk, considering the ESG index. To achieve this goal, we make use of external archiving techniques and evolutionary algorithms. In particular, we first find approximate solutions to the bi-objective problem; then, we look for efficient solutions for ESG. We tested our approach with data on the Dow Jones, S&P500, and Nasdaq100 from Yahoo Finance. The results show that the proposed methodology can identify portfolios with good returns and risks considering ESG.

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Publication Details

Journal
Mathematics
Published
2024-10-08
DOI
https://doi.org/10.3390/math12193145
Citations
3
Primary Topic
Advanced Multi-Objective Optimization Algorithms
Type
article
Field-Weighted Citation Impact
1.08
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article

A Hierarchical Approach to a Tri-Objective Portfolio Optimization Problem Considering an ESG Index

Carlos Hernández, Yeudiel Lara Moreno
3 citations
Mathematics
Advanced Multi-Objective Optimization Algorithms
1.08
article

A Hierarchical Approach to a Tri-Objective Portfolio Optimization Problem Considering an ESG Index

Carlos Hernández, Yeudiel Lara Moreno
article en
3 citations

Abstract

Traditional portfolio construction primarily revolves around a bi-objective approach, focusing on minimizing portfolio variance while maximizing expected returns. However, this approach leaves out other objectives that could interest decision makers. In this work, we incorporate an extra objective, namely the environmental, social, and governance index (ESG), as a secondary objective. This addition empowers investors to customize their portfolios by defining explicit trade-off thresholds between expected returns and risk, considering the ESG index. To achieve this goal, we make use of external archiving techniques and evolutionary algorithms. In particular, we first find approximate solutions to the bi-objective problem; then, we look for efficient solutions for ESG. We tested our approach with data on the Dow Jones, S&P500, and Nasdaq100 from Yahoo Finance. The results show that the proposed methodology can identify portfolios with good returns and risks considering ESG.

MathematicsVol. 12(19)
Universidad Nacional Autónoma de México (MX)
Openalex Percentile: Top 20%
Advanced Multi-Objective Optimization Algorithms
1.08
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A Hierarchical Approach to a Tri-Objective Portfolio Optimization Problem Considering an ESG Index — Carlos Hernández, Yeudiel Lara Moreno · Mathematics (2024) | TGRS Research Map | TGRS