Fuzzy Portfolio Optimization for Power Generation Assets

FCN Working Paper No. 10/2010

38 Pages Posted: 6 Jan 2019

See all articles by Barbara Glensk

Barbara Glensk

RWTH Aachen University

Reinhard Madlener

RWTH Aachen University

Date Written: August 1, 2010

Abstract

Fuzzy sets theory is proposed as an alternative to the probabilistic approach for assessing portfolios of power plants, in order to capture the complex reality of decision-making processes. This paper presents different fuzzy portfolio selection models, where the rate of returns as well as the investor's aspiration levels of portfolio return and risk are regarded as fuzzy variables. Furthermore, portfolio risk is defined as a downside risk, which is why a semi-mean-absolute deviation portfolio selection model is introduced. Finally, as an illustration, the models presented are applied to a selection of power generation mixes. The efficient portfolio results show that the fuzzy portfolio selection models with different definitions of membership functions as well as the semi-mean-absolute deviation model perform better than the standard mean-variance approach. Moreover, introducing membership functions for the description of investors' aspiration levels for the expected return and risk shows how the knowledge of experts, and investors' subjective opinions, can be better integrated in the decision-making process than with probabilistic approaches.

Keywords: Portfolio Analysis, Semi-Mean-Absolute Deviation Model, Fuzzy Sets Theory, Optimal Power Generation Mix

JEL Classification: C02, C44, C61, D81, Q40

Suggested Citation

Glensk, Barbara and Madlener, Reinhard, Fuzzy Portfolio Optimization for Power Generation Assets (August 1, 2010). FCN Working Paper No. 10/2010. Available at SSRN: https://ssrn.com/abstract=3305146 or http://dx.doi.org/10.2139/ssrn.3305146

Barbara Glensk

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustra├če 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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