Fuzzy optimization for portfolio selection based on Embedding Theorem in Fuzzy Normed Linear Spaces

Background: This paper generalizes the results of Embedding problem of Fuzzy Number Space and its extension into a Fuzzy Banach Space C(Ω) × C(Ω), where C(Ω) is the set of all real-valued continuous functions on an open set Ω.

Objectives: The main idea behind our approach consists of taking advantage of interplays between fuzzy normed spaces and normed spaces in a way to get an equivalent stochastic program. This helps avoiding pitfalls due to severe oversimplification of the reality.

Method: The embedding theorem shows that the set of all fuzzy numbers can be embedded into a Fuzzy Banach space. Inspired by this embedding theorem, we propose a solution concept of fuzzy optimization problem which is obtained by applying the embedding function to the original fuzzy optimization problem.

Results: The proposed method is used to extend the classical Mean-Variance portfolio selection model into Mean Variance-Skewness model in fuzzy environment under the criteria on short and long term returns, liquidity and dividends.

Conclusion: A fuzzy optimization problem can be transformed into a multiobjective optimization problem which can be solved by using interactive fuzzy decision making procedure. Investor preferences determine the optimal multiobjective solution according to alternative scenarios.