Equity portfolio optimization: A DEA based methodology applied to the Zagreb Stock Exchange

Authors

  • Margareta Gardijan Faculty of Economics and Business, University of Zagreb
  • Tihana Škrinjarić Faculty of Economics and Business, University of Zagreb

Abstract

Most strategies for selection portfolios focus on utilizing solely market data and implicitly assume that stock markets communicate all relevant information to all market stakeholders, and that these markets cannot be influenced by investor activities. However convenient, this is a limited approach, especially when applied to small and illiquid markets such as the Croatian market, where such assumptions are hardly realistic. Thus, there is a demand for including other sources of data, such as financial reports. Research poses the question of whether financial ratios as criteria for stock selection are of any use to Croatian investors. Financial and market data from selected publicly companies listed on the Croatian capital market are used. A two-stage portfolio selection strategy is applied, where the first stage involves selecting stocks based on the respective Data Envelopment Analysis (DEA) efficiency scores. DEA models are becoming popular in stock portfolio selection given that the methodology includes numerous models that provide a great flexibility in selecting inputs and outputs, which in turn are considered as criteria for portfolio selection. Accordingly, there is much room for improvement of the current proposed strategies for selecting portfolios. In the second stage, two portfolio-weighting strategies are applied using equal proportions and scoreweighting. To show whether these strategies create outstanding out–of–sample portfolios in time, time-dependent DEA Window Analysis is applied using a reference time of one year, and portfolio returns are compared with the market portfolio for each period. It is found that the financial data are a significant indicator of the future performance of a stock and a DEA-based portfolio strategy outperforms market return.

Author Biographies

Margareta Gardijan, Faculty of Economics and Business, University of Zagreb

Department of Mathematics, Research and teaching assistant

Tihana Škrinjarić, Faculty of Economics and Business, University of Zagreb

Department of Mathematics, Research and teaching assistant

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Published

2015-10-27

Issue

Section

CRORR Journal Regular Issue