A fuzzy rule based expert system for stock evaluation and portfolio construction: An application to Istanbul Stock Exchange

The aim of this study is to construct appropriate portfolios by taking investor's preferences and risk profile into account in a realistic, flexible and practical manner. In this concern, a fuzzy rule based expert system is developed to support portfolio managers in their middle term investment decisions. The proposed expert system is validated by using the data of 61 stocks that publicly traded in Istanbul Stock Exchange National-100 Index from the years 2002 through 2010. The performance of the proposed system is analyzed in comparison with the benchmark index, Istanbul Stock Exchange National-30 Index, in terms of different risk profiles and investment period lengths. The results reveal that the performance of the proposed expert system is superior relative to the benchmark index in most cases. Additionally, in parallel to our expectations, the performance of the expert system is relatively higher in case of risk-averse investor profile and middle term investment period than the performance observed in the other cases.

[1]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[2]  Constantin Zopounidis,et al.  IPSSIS: An integrated multicriteria decision support system for equity portfolio construction and selection , 2011, Eur. J. Oper. Res..

[3]  Dimitris Askounis,et al.  Common stock portfolio selection: a multiple criteria decision making methodology and an application to the Athens Stock Exchange , 2009, Oper. Res..

[4]  Arash Bahrammirzaee,et al.  A comparative survey of artificial intelligence applications in finance: artificial neural networks, expert system and hybrid intelligent systems , 2010, Neural Computing and Applications.

[5]  Thomas H. Goodwin,et al.  The Information Ratio , 1998 .

[6]  Pavel V. Sevastjanov,et al.  A new approach to the rule-base evidential reasoning: Stock trading expert system application , 2010, Expert Syst. Appl..

[7]  Mehdi R. Zargham,et al.  PORSEL: an expert system for assisting in investment analysis and valuation , 2005, Soft Comput..

[8]  Kathrin Klamroth,et al.  An MCDM approach to portfolio optimization , 2004, Eur. J. Oper. Res..

[9]  Ebrahim H. Mamdani,et al.  An Experiment in Linguistic Synthesis with a Fuzzy Logic Controller , 1999, Int. J. Hum. Comput. Stud..

[10]  John L. Maginn.  Managing Investment Portfolios: A Dynamic Process , 2008 .

[11]  John Psarras,et al.  Equity portfolio management within the MCDM frame: a literature review , 2009 .

[12]  Roy Rada,et al.  Expert systems and evolutionary computing for financial investing: A review , 2008, Expert Syst. Appl..

[13]  Vladan Devedzic,et al.  Expert systems in finance - a cross-section of the field , 2002, Expert Syst. Appl..

[14]  F. Reilly,et al.  Investment Analysis and Portfolio Management , 1979 .

[15]  Kostas S. Metaxiotis,et al.  On the selection of equity securities: An expert systems methodology and an application on the Athens Stock Exchange , 2009, Expert Syst. Appl..

[16]  Gholam Ali Montazer,et al.  Design and implementation of fuzzy expert system for Tehran Stock Exchange portfolio recommendation , 2010, Expert Syst. Appl..