Portfolio optimization – two rules approach

A new approach to the portfolio optimization, based on the concept of two-factor utility function, is proposed. The first factor describes the expected average profit, while the second gives the worse case profit. Then, two rules allowing to compose an optimum portfolio are formulated. The first rule determines the level of acceptance for all assets with given risk/return ratio. The second rule enables one to allocate the investment fund among all the accepted assets. The methodology proposed does not require to specify the individual utility functions in an explicit form. It can be used to optimize portfolios composed of equities as well as bond and other securities, using a passive or active management strategy.