The impact of different economic scenarios towards portfolio selection in enhanced index tracking problem

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2 Citations (Scopus)

Abstract

Enhanced index tracking is a portfolio management which aims to track and outperform the benchmark stock market index without purchasing all stocks from the benchmark index components. Enhanced index tracking is a portfolio selection problem which can be represented by an optimization model. The objective of this paper is to study the impact of three different economic scenarios towards portfolio selection and portfolio performance in enhanced index tracking problem. The economic scenarios are divided into three sub-periods representing the growth period in the economy, financial crisis and the recovery period. In this study, the optimization model with sum weighted approach is applied in constructing the optimal portfolio. This paper also studies the consistency of the optimal portfolios to outperform the benchmark index for the three economic scenarios. The data consists of weekly price of 24 components stocks in Malaysia main market index which is Kuala Lumpur Composite Index from January 1994 until June 2008. The results of this study show different optimal portfolio selections and performances for the three economic scenarios. Besides that, the optimal portfolios are able to generate higher mean return than the benchmark index return with only selecting 10% from the benchmark index components for the three economic scenarios. Therefore, the optimization model with sum weighted approach is appropriate for the investors in Malaysia. The significance of this study is to identify the optimal portfolios for three different economic scenarios to track and outperform Malaysia market index consistently. In addition, this study concludes that the performance of the optimal portfolio is the highest during economic recovery in Malaysia.

Original languageEnglish
Pages (from-to)1285-1288
Number of pages4
JournalAdvanced Science Letters
Volume21
Issue number5
DOIs
Publication statusPublished - 1 May 2015

Fingerprint

portfolio selection
Portfolio Selection
Benchmarking
Economics
scenario
Optimal Portfolio
Malaysia
Scenarios
economics
Benchmark
optimization model
Optimization Model
Weighted Sums
Recovery
Purchasing
index
portfolio management
performance
Portfolio Management
Financial Crisis

Keywords

  • Economic crisis
  • Economic growth
  • Economic recovery
  • Optimal portfolio
  • Optimization model
  • Portfolio performance

ASJC Scopus subject areas

  • Engineering(all)
  • Environmental Science(all)
  • Computer Science(all)
  • Energy(all)
  • Mathematics(all)
  • Health(social science)
  • Education

Cite this

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abstract = "Enhanced index tracking is a portfolio management which aims to track and outperform the benchmark stock market index without purchasing all stocks from the benchmark index components. Enhanced index tracking is a portfolio selection problem which can be represented by an optimization model. The objective of this paper is to study the impact of three different economic scenarios towards portfolio selection and portfolio performance in enhanced index tracking problem. The economic scenarios are divided into three sub-periods representing the growth period in the economy, financial crisis and the recovery period. In this study, the optimization model with sum weighted approach is applied in constructing the optimal portfolio. This paper also studies the consistency of the optimal portfolios to outperform the benchmark index for the three economic scenarios. The data consists of weekly price of 24 components stocks in Malaysia main market index which is Kuala Lumpur Composite Index from January 1994 until June 2008. The results of this study show different optimal portfolio selections and performances for the three economic scenarios. Besides that, the optimal portfolios are able to generate higher mean return than the benchmark index return with only selecting 10{\%} from the benchmark index components for the three economic scenarios. Therefore, the optimization model with sum weighted approach is appropriate for the investors in Malaysia. The significance of this study is to identify the optimal portfolios for three different economic scenarios to track and outperform Malaysia market index consistently. In addition, this study concludes that the performance of the optimal portfolio is the highest during economic recovery in Malaysia.",
keywords = "Economic crisis, Economic growth, Economic recovery, Optimal portfolio, Optimization model, Portfolio performance",
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