Enhancing Portfolio Management Using Artificial Intelligence: Literature Review

Journal
Frontiers in Artificial Intelligence
Date Issued
2024-03-12
Author(s)
Sutiene, Kristina
Schwendner, Peter
Sipos, Ciprian
Lorenzo, Luis
Kabasinskas, Audrius
Tidjani, Chemseddine
Ozturkkals, Belma
Cerneviciene, Jurgita
Abstract
Building an investment portfolio is a problem that numerous researchers have addressed for many years. The key goal has always been to balance risk and reward by optimally allocating assets such as stocks, bonds, and cash. In general, the portfolio management process is based on three steps: planning, execution, and feedback, each of which has its objectives and methods to be employed. Starting from Markowitz's mean-variance portfolio theory, different frameworks have been widely accepted, which considerably renewed how asset allocation is being solved. Recent advances in artificial intelligence provide methodological and technological capabilities to solve highly complex problems, and investment portfolio is no exception. For this reason, the paper reviews the current state-of-the-art approaches by answering the core question of how artificial intelligence is transforming portfolio management steps. Moreover, as the use of artificial intelligence in finance is challenged by transparency, fairness and explainability requirements, the case study of post-hoc explanations for asset allocation is demonstrated. Finally, we discuss recent regulatory developments in the European investment business and highlight specific aspects of this business where explainable artificial intelligence could advance transparency of the investment process.