Usefulness of identifying a leading sector method in portfolio analysis

The development of the stock market occurs as a result of the impact of many factors. Knowledge of the whole market is synonymous with the necessity of expertise in this market at different levels of aggregation. Staying at the sectoral level, it can be assumed that the level of economic and financial development of the sector, shaping the economic and stock market conditions is a derivative of the level of development and market condition of economic entities included in its composition. Important is the ability to identify leading sectors or companies that make up the stock market. This identification is important for several reasons, one of them being the investment process. But there is a question of how to identify the leading sector. The main goal of the paper is to identify the leading sectors on the stock market and to employ this approach to construct a portfolio. This approach should contribute to better efficiency of portfolio analysis in practice while reducing the risk of investing in shares. The pool of companies for which portfolios are constructed comprises entities representing three leading sectors. The research was conducted for the Warsaw Stock Exchange in the 2006-2015 period. In the analysis, the information about some fundamental factors was used. These selected factors were used to construct the fundamental power index (FPI) (in a dynamic way). The portfolio was constructed with the classical Markowitz model. Portfolios were then appraised based on their actual returns in relation to the return on the market measured with the WIG20 index. A hypothetical acquisition of each portfolio took place during the first stock ex-change session on the Warsaw Stock Exchange in 2006. The portfolios were appraised as of the end of each year between 2006 and 2015 and for the entire period of the study.