Analysis of the Impact of Investor Confidence in Information on Selection of Optimal Portfolio of Financial Instruments

In this article, investor confidence in information is considered to be the main factor affecting the choice of an optimal portfolio of financial instruments under conditions of uncertainty, and determining investor behavior. A problem with modern portfolio theory is that it does not consider individual investor preferences.

The purpose of this study is to revise the traditional concept of evaluating portfolios of financial instruments based on G. Markowitz’s approach. The subject matter is investor behavior that develops in the context of constructing portfolios, evaluating risk components using the W. Sharpe coefficient, and subsequent portfolio modifications due to changes in financial markets or individual investor preferences.

Materials and methods. The theoretical and methodological basis of the research are the approaches developed by domestic and foreign authors, who consider issues in the field of portfolio theory and game-theoretical modelling. The first step is to evaluate Sharpe ratios of financial assets based on real-world data in order to decide whether or not to include them in a portfolio. The second step is clustering alternative financial instruments (low, medium, and high Sharpe ratio values). The third procedure analyzes strategies for constructing portfolios of financial instruments based on Sharpe coefficients. The fourth procedure involves constructing several alternative portfolios in accordance with the presented strategies of the investor. The fifth procedure selects and describes several possible financial market conditions determined by the market index. Following this, the procedure involves constructing a yield matrix, each element of which represents the accumulated return received by the investor if funds are placed in one of the alternative portfolios if financial market implements one of possible conditions. Finally, implementation of the seventh procedure requires determining probabilities of financial market condition determined by market index in order to reduce degree of uncertainty. The last step is to find the optimal portfolio of financial instruments considering the level of investor’s confidence in information, relative to the yield matrix previously constructed and the matrix of risks uniquely generated by it.

Results of the research. The result of the study is a procedural scheme that allows a new approach to designing portfolios of financial instruments and choosing the optimal one, considering the level of investor’s confidence in information. This scheme also reveals the potential for game analysis of how an investor’s confidence in information affects the choice of a financial instrument portfolio in uncertain market conditions.

Conclusion. The results obtained by the author in the form of two games models of interaction between investors and the financial market are useful for further research in financial mathematics. This material can be used for the development of content for professional training of analysts in higher economic education system.

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