Application of enhanced cluster validity index function to automatic stock portfolio selection system

Authors:
Kuang Yu Huang;Shiuan Wan
Affiliations:
Department of Information Management, Ling Tung University, Taichung City, Taiwan 408;Department of Information Management, Ling Tung University, Taichung City, Taiwan 408
Venue:
Information Technology and Management
Year:
2011

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Abstract

This paper presents an automatic stock portfolio selection system. In the proposed approach, 53 financial indices are collected for each stock item and are consolidated into six financial ratios [Grey relational grades (GRGs)] using a Grey relational analysis model. The GRGs are processed using a modified form of the PBMF index method (designated as the Huang index function) to determine the optimal number of clusters per GRG. The resulting cluster indices are then processed using rough set theory to identify the stocks within the lower approximate sets. Finally, the GRGs of each stock item in the lower approximate sets are consolidated into a single GRG, indicating the ability of the stock item to maximize the rate of return. It is demonstrated that the proposed stock selection mechanism yields a higher rate of return than several existing portfolio selection systems.