Abstract
Asset allocation is a critical concern for any investor in the financial market. This paper aims to prioritize five randomly selected firms from the top ten stocks by market capitalization of the Shanghai Stock Exchange (SSE) by opting for adequate financial procedures and practical criteria under uncertain conditions. Decision makers want not only the ranking order of stocks but also capital proportions to be allocated. Therefore, this study uses a hybrid multi-criteria decision-making (MCDM) approach comprising of an integrated analytic network process (ANP) and decision making trial and evaluation laboratory (DEMATEL) in a grey environment for optimal portfolio selection to provide both ranking and weighting information for decision makers. Results indicate that return, financial ratios, dividends, and risk are causal criteria group, which are the most influential determinants for obtaining high benefits with regards to stock portfolio selection in SSE. The free float of stocks is the least influencing criterion among all identified criteria of stock portfolio selection of SSE. The Industrial and Commercial Bank of China Ltd. stocks have the highest allocated proportion with the highest priority shown by investors and can be described as a suitable alternative. The practical implications of this research are that the approach, when applied, highlights how the grey system theory minimizes the uncertainties in all stages of decision-making of portfolio selection.
Highlights
The framework of optimal portfolio dubbed Modern Portfolio Theory (MPT) can be accredited to seminal works by Markowitz (1952) and Roy (1952)
As illustrated by MV analysis, return is a major criterion for portfolio selection and the results from this study indicate that both return and risk aside financial ratios and dividends are influential in stock portfolio selection of Shanghai Stock Exchange (SSE)
Incorporating a multi-criteria decision-making (MCDM) approach in a grey environment into the theory of portfolio selection is key in allocating wealth and ranking order of stocks under uncertainty
Summary
The framework of optimal portfolio dubbed Modern Portfolio Theory (MPT) can be accredited to seminal works by Markowitz (1952) and Roy (1952). Atta Mills, Yan, Yu and Wei (2016) proposed a consolidated risk measure based on variance and safety-first principle in a mean-risk portfolio optimization framework These later advancements of portfolio theory can be classified but not limited to three categories: building models that reflect investor’s preferences, incorporating real-world market constraints, and using attributes of diverse areas to deal with practical portfolio strategy problems. A multi-criteria decision-making (MCDM) approach can be considered in selecting an optimal portfolio. An MCDM approach in a grey environment provides a robust and user-friendly modeling tool for optimal portfolio selection To this end, the purpose of this study is to utilize a hybrid multi-criteria decision-making approach comprising of integrated grey-DEMATEL with grey-ANP for optimal stock portfolio selection.
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