Portfolio optimization using the semi-variance model with a focus on positive potential (Case study: Tehran Stock Exchange)

Document Type : Original Article

Authors

1 Master student, School of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran.

2 Ph.D. Student, School of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran.

3 Associate Professor, School of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran.

Abstract

Investing in the stock market plays a fundamental role in economic growth and development by providing companies and governments with investment opportunities, funding and stimulating economic activity. Putting together a suitable investment portfolio for stock market activities is of utmost importance and requires skill and the ability to optimally combine different stocks to achieve desirable performance and better returns. Paying attention to market fluctuations when constructing an investment portfolio is crucial as they indicate changes and dynamics in the market. Investment decisions made based on these fluctuations help investors reduce their financial risks and identify investment opportunities. In addition, attention to positive volatility is important in portfolio construction as these fluctuations indicate the growth potential and profitability of stocks. The aim of this research is to construct an optimal investment portfolio to take advantage of the benefits and investment opportunities arising from positive volatility, while considering negative volatility and its reduction. To achieve this, a novel approach, the so-called two-stage semi-variance approach, is introduced. Using monthly stock data from the beginning of March 2018 to March 2023, the stock portfolio is constructed, and the efficiency of this model is evaluated by comparing it with the semi-variance model and the equally weighted portfolio. The results show that the two-stage semi-variance approach outperforms the semi-variance model and the equally weighted portfolio. This indicates that this approach can significantly improve the efficiency and performance of investment portfolios compared to traditional methods.

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References

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Budget and Finance Strategic Research
Volume 5, Issue 1 - Serial Number 17
Spring Quarterly
April 2024
Pages 57-78

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History

  • Receive Date: 31 December 2023
  • Revise Date: 28 January 2024
  • Accept Date: 13 April 2024

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