Stock portfolio selection using a decision support system

Stock portfolio selection is always an important and challenging problem. It involves multiple and conflicting objectives such as maximizing annual return, minimizing total risk, maximizing annual dividend, etc. Also, the decision-making environment contains several uncertain factors.

Objectives

The objectives of this paper are as follows:

• To design a decision support system for constructing an efficient portfolio of securities.
• To study the impacts of conflicting goals and find the compromised solution that is most suitable to the decision maker.
• To meet the requirements of individual investors or practitioners effectively by satisfying the considered goals and find out the investment decision.

Data/Methods

We have collected data for Standard & Poors 500 constituents as the population from the data source Bloomberg. Finally, we have selected 30 stocks. Since the considered model involves multiple and conflicting objectives, we have incorporated the goal programming technique to deal with them. The uncertainty of the decision-making environment has been described fuzzily. Therefore, the concept of fuzzy set theory is also incorporated in the methodology. The goal programming technique converts individual objectives to goals and establishes the trade-off among conflicting objectives. Fuzzy set theory is used to incorporate impreciseness of the decision-making environment and allows to set a flexible target for each goal.

Results/Expected Results

The proposed decision support system provides flexibility to the decision maker to refine the tolerance and target values of goals to find a feasible and compromise solution based on the current market conditions and forecasts of economic and financial variables. The effectiveness and applicability of the model is demonstrated via a case example of selected securities. We find relationships among various factors from the obtained results. The most important finding is related to the return on investment which indicates that in the current volatile economic situation, it is advantageous to invest in the middle term, i.e., for the period of three years. The rate of return is higher for this period than that of one-year term. The risk is also more in the short term.

Keywords: Goal Programming, Fuzzy Set Theory, Portfolio Selection, Decision Support System.