Task 1 – Equity Analysis

1. Introduction (10%) – 300 words

Company Overview:

- Established in 1852, Wells Fargo & Company (NYSE: WFC) achieved early success
in the stagecoach industry.
- A prominent financial services firm with assets of about $1.9 trillion
- It supports over 10% of small enterprises and one in three households in the US.
- One of the top US middle-market banks.

As of December 2023, official data displayed on their website (Wells Fargo, 2023):

- Over 238,000 people work for the company worldwide.

- Over 68 million customers have shown their trust in the company.
- Situated in 22 different nations worldwide.
- 12,000 24-hour ATMs and over 5600 branches are available.

Main products and derive profit:

WFC generates revenue from multiple components (Figure 1)

Figure 1. Revenues of WFC worldwide (2013-2022) by segment

(Source: Statista, 2023)

Community Banking, Wholesale Banking, and Wealth & Investment Management (WIM)
were the company's three primary business segments until the year 2017. However, with the
goal to shift towards customer-centric, CEO Timothy J. Sloan mentioned in the Annual
Report (2018) that:

- Wholesale Banking at WFC underwent a transformation to streamline processes,

eliminate duplication, and foster collaboration across divisions. The goal is to enhance
customer and team member experiences, better meet evolving needs, and deliver
efficient financial solutions globally, including Commercial Banking and Corporate &
Investment Banking.
- The company improved the customer and team member experience within Consumer
Banking & Lending with speed, convenience, and new digital offerings.
- We are also transforming our Wealth and Investment Management (WIM) businesses
to make them more client-centric. The changes we are making are designed to make
WIM faster, simpler, and better for clients, with a focus on the research, thought
leadership, and advice that WIM clients value. define priorities, assess progress, and
enhance our corporate governance practices.
- Community Banking offers a complete line of diversified financial products and
services for consumers and small businesses including checking and savings accounts,
credit and debit cards, and automobile, student, mortgage, home equity and small
business lending, as well as referrals to Wholesale Banking and WIM business
partners. The Community Banking segment also includes the results of our Corporate
Treasury activities net of allocations (including funds transfer pricing, capital,
liquidity and certain corporate expenses) in support of other segments and results of
investments in our affiliated venture capital and private equity partnerships. We
continue to wind down the personal insurance business and expect to substantially
complete these activities in the first half of 2019.

Consumer Banking and Lending is Wells Fargo's largest segment, representing

approximately 46.3% of total revenue in 2022. This segment includes car, home, and small
business lending, as well as debit card and credit card fees.

The second largest segments, Corporate and Investment Banking, and Wealth and Investment
Management, each make up about 17.9% and 19.3% of total revenue, respectively.

Corporate and Investment Banking provides capital financing, corporate trust services,
market risk and foreign exchange services, investment services, and a variety of other
products and services to businesses and institutions. Wealth and Investment Management
provides individuals with wealth planning services, financial advisors, trust services, and
private banking. This segment is made up of several businesses including The Private Bank,
Downing, and Wells Fargo Advisors.

Wells Fargo’s Commercial Banking segment makes up approximately 11.7% of the

company’s total revenue. This segment derives its revenue from middle-market banking and
asset-based lending and leasing.

Finally, Wells Fargo provides an assortment of other products and services not included in
the segments above. In its earnings reports, these are grouped under “Corporate”. Some of
these products and services include corporate treasury and enterprise functions, Wells Fargo’s
investment portfolio, and affiliated venture capital and private equity businesses. Corporate
also includes businesses that no longer align with the company’s long-term strategic goals, or
those businesses that have been divested. In total, this segment brought in about 8.2% of the
company’s total revenue in the twelve months ending September 30, 2021.

Asset Mix

Wells Fargo is primarily a consumer/commercial bank with a large portion of its assets being
loans; as of 2022, the company’s net loans made up nearly 52% of total assets. Below is a
breakdown of the company’s assets.

Figure 2. WFC Asset mix (Datasource: Annual Report, 2022)

Main competitors

- JP Morgan Chase:

• The biggest bank in the US

 • Rank in the top 10 globally for total assets

• Market capitalization of $392.27B as of Oct 2023.

- Bank of America:

• One of the biggest wealth management firms globally

• One of the biggest investment banking businesses globally

• Market capitalization of $199.43B as of Oct 2023

- Citigroup Inc.:

• Citigroup falls fourth place behind Wells Fargo as the largest bank in the US

• Market capitalization of $73.18B as of Oct 2023.

2. Management Analysis (10%) – 300 words

This section analyzes the company’s management and their impact on Firm Performance.
Who are the managers and key employees? Identify their strengths and weaknesses. What is
the shareholding pattern and its impact on governance? Past actions of management and
corporate governance score.
The management team
Director nominees

Their compensation

Strengths & Weaknesses

Focus on risk control

- legacy issues => have influenced currently on operations, profit, and reputation because
they have to pay penalties for fake accounts made in 2016.

Past actions:
- corporate governance score: 6

3. SWOT analysis (20%) – 600 words

In this section do a detailed analysis of the strengths, opportunities, weaknesses, and threats
for the firm.

Strengths:

- Robust network and infrastructure:

  An extensive network of branches and ATMs across the United States.

 The bank’s strong infrastructure is a testament to its commitment to providing reliable

and accessible banking solutions.

- Embrace technological advancements:

 Internet banking: The 1st major US financial services firm to offer Internet banking in
May 1995.
 Online banking and service: Rolled out their online money management system in
2005. 2012-2020: improved mobile applications, offered online and mobile banking
services, and online investment platforms.
 Wells Fargo Vantage: longevity, new product, New one-stop-shop for digital banking
launched in December 2022. Enhanced features, drive a more personalized experience
through AI & ML.
 Patents: 1013 patents globally, 858 have been granted, and more than 90% of patents
are active. Some top companies are using Wells Fargo Patents to Advance their
Research. Analyze the best patent cited by other companies (outstanding function,
usage, why is it used? what is it used for?)

- Solid financial position:

 Rank 47th largest corporation by Fortune’s 2023

 4th largest bank in the US by total assets
 CET1 ratio in 2022 was 10.8% => 10.8% is good or bad
 Strong credit quality and effective risk management. Overall credit quality remains
solid.

- Various types of customer service and each segment’s profit (Section 1) => Cater to the
diverse needs of individuals, businesses, and institutions, positioning itself as a one-stop
financial solution provider.

- Market leader in SMEs: Small and Medium Enterprise is one of the major markets of Wells
Fargo consisting of diverse economies ranging from Europe, America, and Africa to Asia.

Weaknesses

- Cross-selling scandal of 2016:

• Fraudulent sales scheme running from 2002-2016

• Opened millions of untheorized bank and credit card accounts in customers' names

• Created fake email accounts and transferred money between these accounts.
 • Destroyed their reputation as a bank that had previously stayed away from
controversies.

• Roughly 20% decrease in stock value

• Loss of investor confidence

• Credit downgrade from AA to AA (low)

• Fined $3 Billion in 2022

• After settlement posted a 31% decline in quarterly profits

- Weak Community and Commercial Banking:

 Community banking revenue decline of 3.4% in 2020

 Commercial banking revenue decline of 6.8% in 2021

 Aftermath of cross-selling scandal

 Not helped by COVID-19 and lower economic activities at the time

- Increasing operations cost

 Struggled to keep costs low over recent years

 Result of fines and operating with older technology

 47.21% increase between September 2022 and September 2023

Opportunities

- Developing market: Expand Operations in emerging countries: Reasons and benefit

- Digital Innovation: Invest in digital transformation to provide easier-to-use products. Drive

technological speed, agility, and scalability for its customers and employees. Focus on data
confidentiality.

- Sustainable techniques: ESG products, the company has projects for the ESG => need to
improve? How? How much?

- Diversification: How? Which area?

Threats

- Economics Uncertainty: Interest rate changes (Fed fund rate, BOE)

- Regulatory and compliance challenges:

• Asset cost cap of $1.95 trillion

 • Restricted mortgage servicing business

• Decline on deposits

• CEO still wary of slowing economy

- Cybersecurity risks:

• FBI reported $4.2 billion in losses from cyberattacks

• 2,260 data breaches affecting 232 million records in financial companies between
2018 and 2023

• Invests $250 million a year and recruited more staff for cybersecurity

- Global pandemics:

 Rely on strong economic

 Covid-19 brought the economy to a standstill

 stock price fell by 55% between the start of 2020 and March 2020

 Decline of 80% in comprehensive income for 2020

4. Ratio Analysis (15%) – 450 words

This section analyses the company's performance using ratios based on the financial
statements. Focus on the following set of ratios: Liquidity, Efficiency, Profitability, Leverage,
and cash flow. You can use the ratios discussed in class or any other ratios you deem suitable
for the analysis. Kindly ensure that you include in your analysis a comparison with
competitors and industry averages. Also, do a time trend analysis i.e. compare company
performance with itself over time.

- Liquidity:

Current Assets:

 Increase in short-term investments (Available-for-sale (AFS) and Held-to-maturity

(HTM) debt securities within one year) post-Covid-19 pandemic (2020-2021).

 Maintain liquidity in the form of cash, cash equivalents, and high-quality liquid debt
securities. However total cash & equivalents was lower than Citi.

 In 2022, a reduction in current assets due to a transfer from AFS debt securities to
HTM debt securities (long-term) related to portfolio rebalancing to manage liquidity
and interest rate risk
Current Liabilities

 Focus on reducing short-term borrowings and payables without affecting operations

since 2020 (43.5% decrease in short-term borrowings in 2020 compared to 2019)

 Improve risk management strategies since 2019 (the New CEO took over after the
scandal).

 Ensure stable liabilities.

 Refinance short-term debt into long-term debt to reduce current liabilities.

● Higher annual LCR (average 120%), compared to City (average 117%) and industry
(119%), exceeded the regulatory minimum of 100%.

● The bank has a comfortable buffer of liquid assets to cover its short-term cash
outflows.

● Ensure the ability to meet its short-term obligations (during a 30-day stress period)

● However, WFC’s average net cash outflows were lower than that of Citi => LCRs
were higher (Difference between utilization of high-quality liquid assets (HQLA)
and net cash outflows).
 Liquidity Coverage Ratio
135.00

130.00

125.00

120.00

115.00

110.00

105.00
2018 2019 2020 2021 2022

Wells Fargo Citi Industry

- Efficiency:

 WFC generated an average of $80 billion in revenue while the figure for Citi was
$74 billion on average (within 5 years).

 Higher non-interest income than competitor (gains in affiliated venture capital and
private equity businesses, and gains from the sales of student lending, asset
management, and corporate trust businesses since 2020)

Total Assets Turnover

2018 2019 2020 2021 2022

Wells Fargo Citi Industry

- Profitability:
 In 2020: The Fed kept interest rates at low levels & and COVID-19 impacted business
performance, revenue declined 15% and net income reduced 83% compared to 2019. WFC
built a large Loan Loss reserve to prepare for the economic impact.

In 2022: The Fed Increased interest rates to combat inflation and a slowing economy due to
geopolitics intensity, which affected deposits & and loans, and caused headwinds for
customers, both companies and industry were affected due to this situation.

Noninterest Expenses of WFC were higher than Citi due to higher operating losses.

Pursue initiatives to reduce expenses and create a more efficient and streamlined
organization since Q3 2020.

Return on Assets (ROA, %) Return on Equity (ROE,%)

1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2018 2019 2020 2021 2022 2018 2019 2020 2021 2022

Wells Fargo Citi Industry Wells Fargo Citi Industry

Earn less money on the interest the bank charged on loans compared to what they pay on
deposits in 2020.

Customer requests for payment deferrals as a result of the epidemic in 2020.

In 2022: Net income was impacted by $7 billion of operating losses, primarily related to
historical issues, including litigation, regulatory matters, and customer remediations.

- Dupont Analysis
Wells Fargo & Co
Year 2018 2019 2020 2021 2022
Net Profit Margin 23.94% 20.66% 2.30% 25.81% 16.35%
Asset Turnover 0.05 0.05 0.04 0.04 0.04
Financial Leverage 10.87 11.58 11.88 11.57 11.71
ROE 11.87% 10.78% 1.04% 12.04% 7.51%

Citigroup
Year 2018 2019 2020 2021 2022
Net Profit Margin 23.16% 24.37% 13.18% 29.09% 18.33%
Asset Turnover 0.04 0.04 0.03 0.03 0.03
Financial Leverage 10.68 11.00 12.88 12.56 13.42
ROE 9.40% 10.31% 5.67% 11.46% 7.67%

Industry
Year 2018 2019 2020 2021 2022
Net Profit Margin 26.96% 25.65% 16.07% 33.08% 23.03%
Asset Turnover 0.04 0.04 0.04 0.03 0.03
Financial Leverage 10.57 10.79 11.96 12.15 13.00
ROE 11.50% 10.99% 6.95% 13.70% 9.65%

- Leverage:

Debt – Equity ratio

Debt - Equity Ratio

3.00

2.50

2.00

1.50

1.00

0.50

0.00
2018 2019 2020 2021 2022

Wells Fargo Citi Industry Ave.

  DER Average – 1.53

 Average Equity – 187B

 Average Debt – 288B

 Higher liabilities are common for banks because of the nature of the business

 Wells Fargo’s strategic control of debt over time.

 Long-term debt decreased by 27% over 5 years

 Presented DE ratio is considered normal for Banks

Debt – Asset ratio:

 DAR Ave. = 0.15

 Average Asset – 1,920B

 Average Debt - 288B

 Comparatively, Wells Fargo’s debt-to-equity ratio is significantly less than the

competitor Citi with similar assets.

 Indicates lower financial risk for Wells Fargo

 This is in line with the company’s Risk Control Approach.

 Total Assets are steady from 1.89T to 1.88T from given years. While aggregate debt
goes down.
 Debt - Asset Ratio
0.25

0.20

0.15

0.10

0.05

0.00
2018 2019 2020 2021 2022

Wells Fargo Citi Industry Ave.

Interest coverage ratio

 EBIT/IE 2022 – 1.65

 Challenges of Covid in 2020

 Economic recovery + monetary policy is seen in 2021

 Higher EBIT and lower interest expense

 Low-interest rates caused the cost of borrowing to decrease but also affected interest
income in 2020.

 Growth in non-interest income in 2021 and expenses declined by 7%

 Interest Coverage Ratio
12.00

10.00

8.00

6.00

4.00

2.00

0.00
2018 2019 2020 2021 2022

Wells Fargo Citi Industry Ave.

Cashflow coverage ratio

 Litigation and remediation

 Effects of the Pandemic and Loan Defaults in 2020

 Large loan loss reserve allocation in 2020

 Operating Cashflow for 2021 (-11,525)

 Wells Fargo paid $3 Billion to settle criminal and civil investigations by the Justice
Department and SEC for its aggressive sales practices between 2002 to 2016

 Wells Fargo had to pay $2 Billion to consumers and $1.7 Billion after the Consumer
Financial Protection Bureau for illegal fees and interest charges on Auto loans,
Mortgages, and Deposit accounts.
 Cashflow Coverage Ratio
15.00

10.00

5.00

0.00
2018 2019 2020 2021 2022

-5.00

-10.00

Wells Fargo Citi Industry Ave.

5. Relative Valuation (5%) – 150 words

This section uses the relative valuation techniques learned in class to value your company.
Describe & and justify what you do clearly and comment on the results.

- Price to Earnings ratio (P/E)

• In 2020: Diluted Earnings per common share ($0.41) reduced by 89.5% compared to
2019. The average stock price of WFC in 2020 was $28.6, which was much lower
than Citi's (EPS was $4.75 and the average stock price was $55).

• In 2020, the stock price of WFC was once highly valued from Jan-March and then
experienced a sharp fall in value since March-Nov, resulting in a higher number of
sell-offs (average daily volume-ADV was 44.5 million) compared to Citi (ADV was
28.6 million).

• WFC was impacted by an increase of $11.4 billion to provision for credit losses,
reflecting the economic impact of the COVID-19 pandemic and $1.5 billion of
restructuring charges as a result of efficiency initiatives.

• Share Prices and EPS have witnessed an upward trend since 2021 thanks to an incline
to average $41.5 per share and EPS’ average is $3.96 in 2023.
 P/E Ratio
80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
2018 2019 2020 2021 2022

Wells Fargo & Co Citigroup Industry

Price to Book ratio (P/B)

P/B Ratio
1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00
2018 2019 2020 2021 2022

Wells Fargo & Co Citigroup Industry

• The price-to-book (P/B) ratio measures a stock's price relative to book value.

• Book value per common share of Citi (average $81.65) was higher than WFC
(average $41.6) within 5 years.

• 2021 – Currently, there is not a big gap between the share prices of 2 banks, WFC’s
average share price is $41.5 in 2023 and $44.6 in 2022 while Citi’s is $44.3 in 2023
and $48.3 in 2022.
Dividend Yield (DY)

DY Ratio (%)
5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00
2018 2019 2020 2021 2022

Wells Fargo & Co Citigroup Industry

• 2018 - 2019: Dividends per common share of WFC (average $1.8) were higher than
Citi (average $1.7).

• 2020 – 2022: Dividends per common share of WFC (average $0.97) were lower than
Citi (average $2.04).

• WFC was subject to rules issued by federal banking regulators to implement Basel III
risk-based capital requirements for US banking organizations, limiting the ability to
pay common stock dividends.

• Estimated in 2023, the Dividend Yield of WFC will reach 3.27% (an increase by
about 21% compared to 2022)

Earnings Yield (EY)

 EY Ratio (%)
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2018 2019 2020 2021 2022

Wells Fargo & Co Citigroup Industry

• Earnings yield, which is the inverse of P/E, shows the percentage of a company’s
earnings per share.

• Earnings per share of Citi roughly doubled that of WFC within 5 years.

• Estimated in 2023, the Earnings Yield of WFC will reach 11.2% (an increase of about
46% compared to 2022) thanks to the escalation in earnings per share, at $1.39 per
share in the third quarter, beating analysts' expectations of $1.24 per share.

6. Conclusion (10%) – 300 words

In this section discuss your conclusion about the company’s prospects based on all the
analysis done in previous sections. You must discuss in this section whether your company
has a MOAT or not. Remember, MOATs can be zero, narrow, or wide. Secondly, is the
MOAT getting wider or narrower over time? Finally, make a Buy/Sell recommendation for
the company’s shares and justify your recommendation.

Future Prospects

• Recent management changes that have a focus on risk and control

• Restructured operating segments

• Opportunity to expand and solidify itself in emerging economies

• Increased operating costs and asset cap may restrict growth

• Ratio analysis has been positive considering harsh economic conditions since Covid-
19
 • Leverage and cashflow and P/E ratio data show increased financial stability

• Potential further reinvestment due to a decline in the dividend yield

MOAT analysis

Buy/Sell Recommendation

• Buy and hold

• New stronger management

• Improving reputation

• Resilience during economic uncertainty

• Interest rate cuts forecasted to begin in 2024

• Asset cap removal as early as 2025

• Members of the board buying shares

Insider Buying
Task 2 – Portfolio Theory (20%) – 600 words

The aim of Task 2 is to judge your understanding of portfolio theory, your ability to critically
evaluate the same, and make suggestions on ways to improve the theory. More specifically
we are looking for the following two things in your report.

1. Critically evaluate the strengths and weaknesses of Markowitz Portfolio Theory – this will
include a critical analysis of the assumptions and main results of the theory (10%)

Nowadays, investors' main concerns are choosing the best portfolio so that the highest
possible investment return can be achieved by accepting the least risk. In this regard, the
classical Markowitz model is one of the most widely used models that helps investors get
closer to their goals (Rasoulzadeh et al., 2022).

Markowitz showed that the variance of the rate of return was a meaningful measure of
portfolio risk under a reasonable set of assumptions. The core of the Markowitz mean -
variance model is to take the expected return of a portfolio as the investment return and the
variance of the expected returns of a portfolio as the investment risk (Xia et al., 2000). More
important, he derived the formula for computing the variance of a portfolio. This portfolio
variance formula not only indicated the importance of diversifying investments to reduce the
total risk of a portfolio but also showed how to effectively diversify (Reilly & Brown, 2015).

the risk component of MPT can be measured, using various mathematical formulations, and
reduced via the concept of diversification which aims to properly select a weighted collection
of investment assets that together exhibit lower risk factors than investment in any individual
asset or singular asset class. Diversification is, in fact, the core concept of MPT and directly
relies on the conventional wisdom of “never putting all your eggs in one basket” (Mangram,
2013)
A key aspect in the Markowitz methodology is to characterize the efficient frontier, which
collects all the pairs that yield the maximum mean return portfolio for a given level of risk
(the portfolio variance or standard deviation)

The advantages are as follows:

 The principles can be applied to any investment portfolio, regardless of its size or
complexity. This allows the average investor who has limited knowledge to benefit
from the same tools and techniques used by professional investors. (Tamplin, 2023)

 MPT can help investors make more informed decisions about their investments. The
use of mathematical models also helps reduce the impact of emotional biases on
investment decisions. MPT provides a systematic framework for investors to quantify
 and manage risk. The reliance on objective data and analysis can help investors make
more rational and evidence-based investment decisions.

 MPT is an excellent tool for passive investors who seek to achieve their investment
goals without constantly buying and selling assets. Passive investors who follow the
principles of MPT can build a diversified portfolio that can optimize risk and return
based on long-term investment goals, which enables them to minimize costs, reduce
risk, and achieve their financial objectives over time

 Diversification helps investors understand different sectors and trade-off between risk
and return. is expected to be a powerful tool, since, in principle, it enables investors
to efficiently allocate their wealth to different investment alternatives and reduce
overall portfolio risk (Leung et al., 2012)

 Such portfolios suit both long-term wealth creation and short-term profits.

 A variety of financial instruments fit this investment strategy: bonds, stocks and
other assets

The disadvantages are as follows:

 This approach is often called Markowitz Mean Variance Model. It is more inclined
towards variance and tends to overlook potential risks. (Investopedia, 2023)

 it assumes that investors are rational and risk-averse. However, many investors are not
rational and may not be willing to take on risk to achieve higher returns.
(FasterCapital, 2023)

 it assumes that investors have perfect information about the assets they are investing
in. However, in reality, investors may not have all the information they need to make
informed decisions.

 it assumes that markets are efficient and that asset prices reflect all available
information. However, this may not always be the case, as markets can be affected by
irrational behavior and external factors.

 the model assumes that investors are solely focused on risk and return, disregarding
other factors such as liquidity, transaction costs, and personal preferences, result in
ineffcient portfolios (Xia et al., 2000)

 It does not guarantee good returns and is only based on historical data. argue that the
MVOF tends to ignore the error of input variables, and further amplifies the influence
of the error into the investment weight of stocks in a portfolio as the output. The
 MVOF determines the amount to be invested in each stock during the future period
using estimates of input variables in the past period, such as the mean and standard
deviation of stocks and the correlation matrix between stocks. The input variables that
are estimated in the past period cannot avoid the possibility of the error because it is
not a true value. (Eom & Park, 2018)

 The model does not account for associated costs like broker commissions, taxes, and
other charges.

2. Make recommendations on how Markowitz's Portfolio Theory could be improved (10%)

Markowitz’s (1952) seminal work shows that the optimal portfolio for a mean-variance
investor is a combination of the tangency portfolio and a riskless asset (two-fund separation).
However, the framework requires knowledge of both the mean and covariance matrix of the
asset returns, which in practice are unknown and have to be estimated from the data. The
standard approach, ignoring estimation risk, simply treats the estimates as the true parameters
and plugs them into the optimal portfolio formula derived under the mean-variance
framework. Kan and Zhou (2007) show that the Bayesian decision rule under a diffuse prior
outperforms the MV optimization. t it always yields higher expected out-of-sample
performance no matter what the true parameter values are. The Bayesian approach deals with
parameter uncertainty by assuming the investor cares about the expected utility under the
predictive distribution p(RT+1|ΦT), which is determined by both the historical data and the
prior. With a good choice of prior (say highly centered around the true values), there is no
doubt that a Bayesian portfolio rule can substantially outperform the classic plugin rules.

(Laengle et al., 2017) A key problem in Markowitz’s mean-variance approach is the

aggregation process of the mean and the variance with the arithmetic mean or the weighted
average. These two averaging aggregation operators are the most common ones, but it is
possible to use other ones for doing so [9]–[12]. A very wellknown is the ordered weighted
average (OWA) that aggregates the data taking into account the degree of optimism and
pessimism of the decision maker [13], [14].

The objective of this study is to develop a mean-variance portfolio approach by using the
OWA operator in the aggregation of the expected returns and risks. The main idea is to
replace the mean and the variance used in Markowitzs model by the OWA operator and the
variance-OWA (Var-OWA) [27]. Observe that the OWA and the Var-OWA are
generalizations of the traditional mean and variance that take into account the degree of
optimism or pessimism of the decision maker and any situation from the most pessimistic to
the most optimistic one.
Markowitz’s approach is based on the use of the mean and the variance. These techniques are
usually studied with an arithmetic mean or a weighted average (or probability). However, the
degree of uncertainty is usually more complex and it is necessary to represent the information
in a deeper way. In this case, more general aggregation operators are needed in order to
assess the information properly. A practical technique for doing so is the OWA operator
because it provides a parameterized group of aggregation operators between the minimum
and the maximum. Moreover, it is able to represent the attitudinal character of the decision
maker in the specific problem considered. Therefore, the main advantage of this approach is
that it represents the problem in a more complete way because it can consider any scenario,
varying from the most pessimistic to the most optimistic one and select the situation that is in
closest accordance with the investor’s attitudes.

One of the key ideas of this approach is to introduce a model that can adapt better to
uncertain environments because Markowitz’s approach is usually focused on risky
environments. Note that with the expected value it is possible to consider subjective and
objective probabilities, but it is not possible to assess situations without any type of
probabilities. An alternative for dealing with these situations is the OWA operator which
aggregates the information according to the attitudinal character of the investor.

Next, let us look into the other main perspectives when dealing with portfolio selection. The
analysis of risk in Markowitz’s approach is based on the use of the variance measure. In this
paper, we have suggested using the Var-OWA as a measure of risk. The main advantage is
that this formulation is more general than the classical variance because it provides a
parameterized family of variances between the minimum and the maximum one. Thus, it
gives a better representation of the problem and selects the specific result that is in closest
accordance with the attitude of the decision maker.

The OWA operator can improve the current portfolio selection approaches based on
Markowitz mean-variance framework. The key advantage of the OWA operator is the ability
to represent complex scenarios by using the degree of optimism and pessimism of the
decision maker. Therefore, the OWA aggregates the data considering the attitudinal character
that an individual has in the specific analysis considered. This methodology implicitly
assumes that the probabilistic information is unknown mainly because there is a high degree
of uncertainty. The paper has implemented the use of the OWA operator in the mean return
and the risk of any asset instead of using the classical approaches based on weighted
averages. By using the OWA operator, the investor obtains a more general perspective of the
situation because he can analyze any scenario from the minimum to the maximum and select
the specific case closest to his interests.

a new way of analyzing the degree of optimism and pessimism that considers the specific
values of the arguments. Thus, rather than only considering the weights, it considers the
position of the numerical values of the arguments which also conditions the optimism or
pessimism of the aggregation. Several numerical examples are studied to numerically
understand the new approach. These examples are developed considering different types of
OWA operators that can be used in the aggregation process including the optimistic,
pessimistic, Olympic, Laplace, and Hurwicz criterion. Various results emerge from this
numerical exercise. First, the isolated ordering effect of OWA indicates that this operator
gives more optimism only on the inefficient portfolio region, and thus, both efficient frontiers
(Markowitz and OWA) are identical. Second, the combined ordering and weighting effect of
OWA suggests that the minimum-risk portfolio is the same in both types of frontiers. This
result is robust to different attitudinal characters of investors. Third, an optimistic investor
faces a better return-risk profile, so he expects, for a given level of either return or risk, a
higher utility than a Markowitzian investor. This dominance becomes exacerbated as the
optimism degree increases, leading to an increasing polarization of portfolio choice in favor
of the individual asset with the best return profile. Fourth, a pessimistic investor faces a
worse return-risk trade-off, so he expects a lower utility than a Markowitzian investor.
Consequently, he always selects the minimum risk portfolio irrespective of his risk-aversion
degree. Fifth, in the case of moderate, Laplace-type, and extremist investors, the results in
general are more ambiguous as they depend on the specific probabilistic and weighting
vectors under consideration.

(Leung et al., 2012) developing a new, improved estimator for the optimal portfolio return
based on an unbiased estimator of the inverse of the covariance matrix R1 and its related
terms. Since we have derived explicit formulas for the optimal return estimator, academics
and practitioners can easily apply it in any real data analysis. In addition, we prove that this
new, improved estimated return is consistent when sample size n ? 1 and the dimension to
sample size ratio p/n ? y 2 (0, 1). Our simulation shows that our proposed improved
estimators dramatically outperform traditional estimators for both the optimal return and its
corresponding allocation under different values of p/n and different inter-asset correlations q,
especially when p/n is close to 1. In addition, our simulation also shows that our improved
estimators perform better than the bootstrap-corrected estimators for both the optimal return
and its corresponding allocation. we provide not only the closed form for the optimal return
estimate and its allocation estimate but also the closed form of its standard deviation, whereas
the bootstrap-corrected estimation does not. In addition, the standard deviation of our
proposed improved return estimator is smaller than that of the plug-in estimate, especially
when p/n is large.

y developing a new closed-form optimal return estimate to capture the essence of portfolio
selection. Since our estimates possess closed forms and are easy to operate and implement in
practice, the whole efficient frontier of our estimates can be constructed analytically. Thus,
our proposed estimators facilitate the Markowitz MV optimization procedure, making it
desirable, implementable, practically useful, and applicable in a variety of situations. e, the
optimization problem can be formulated with short-sales restrictions, trading costs, liquidity
constraints, turnover constraints, and budget constraints. Each of these constraints leads back
to a different model for determining the shape, composition, and characteristics of the
efficient frontier and, thereafter, makes MV optimization a more flexible tool

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