Abstract
Stock selection is the first problem that investors encounter when investing in the stock market and is paramount. The Sharpe ratio is a common assessment strategy. However, the Sharpe ratio considers an uptrend portfolio high risk because it assesses portfolio risk using standard deviations. Hence, we propose a novel investment strategy, namely, the trend ratio, to assess portfolio risk more accurately by the portfolio trend line. Thus, the uptrend portfolio is not considered high risk and is more consistent with the psychology of investors. In addition to normal trading (long selling), short selling is another common trading method. Short selling is borrowing stocks from stock vendors to sell and then repaying the stock at a lower price to make a profit. This paper proposes investing simultaneously in normal trading and short selling by a trend ratio, which can further increase investment profits and spread risks. This paper also adds certificates of deposit as a portfolio choice to ensure that investors can still make profits. This paper utilizes the global quantum-inspired tabu search algorithm with a quantum NOT-gate (GNQTS) to effectively find the best combination of stocks. To avoid the overfitting problem, this paper employs a sliding window. Specifically, this paper combines the trend ratio, GNQTS, short selling with certificates of deposit, and sliding windows to perform the stock selection. The experimental results are promising, with our proposed method having better performance than the Sharpe ratio. Furthermore, the experimental results show that both long selling and short selling investments can increase the performance.
Highlights
In a capitalist society, people want to accumulate wealth to manage unexpected future situations
The trend ratio follows the spirit of the Sharpe ratio to calculate the return and risk with division
The risk in the trend ratio is the deviation from the trend line, and it renders the stable uptrend portfolio with low volatility more consistent with the expectations of investors
Summary
People want to accumulate wealth to manage unexpected future situations. When investing in the stock market, there is a saying: "Do not put all your eggs in one basket." The modern portfolio theory (MPT), proposed by Harry Markowitz in 1952 [1], mentioned that a risk-averse investor should construct a portfolio (i.e., multiple stocks) with the lowest possible risk, rather than investing in one stock. The portfolio expected return on investment (ROI) is calculated by the weights and the expected return of stocks, as shown by Equation 2, where E(rp) is the portfolio expected return, and r(i)is the expected return of the ith stock. Equation 3 defines the risk calculation, where σp is the portfolio risk, while σij is the covariance of stock i and stock j
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