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Fundamental Portfolio Construction Based on Mahalanobis Distance

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Algorithms from and for Nature and Life

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Abstract

In the classic Markowitz model, at an assumed profitability level, the portfolio risk is minimized. The fundamental portfolio introduces an additional condition aimed at ensuring that the portfolio is only composed of companies in good economic condition. A synthetic indicator is constructed for each company, describing its economic and financial situation. There are many methods for constructing synthetic measures. This article applies the standard method of linear order. In models of fundamental portfolio construction, companies are most often organised in order on the basis of Euclidean distance. Due to possible correlation between economic variables, the most appropriate measure of distance between enterprises is the Mahalanobis distance.

The aim of the article is to compare the composition of fundamental portfolios constructed on the basis of Euclidean distance with portfolios determined using the Mahalanobis distance.

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Notes

  1. 1.

    The three-letter abbreviations used at the Warsaw Stock Exchange are used in the paper instead of the full names of stock issuers.

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Authors and Affiliations

  1. Faculty of Economic Sciences, University of Warmia and Mazury, Oczapowskiego 4, 10-719, Olsztyn, Poland

    Anna Rutkowska-Ziarko

Authors
  1. Anna Rutkowska-Ziarko
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Correspondence to Anna Rutkowska-Ziarko .

Editor information

Editors and Affiliations

  1. University of Essex Department of Mathematical Sciences, Colchester, United Kingdom

    Berthold Lausen

  2. Ghent University Department of Marketing, Ghent, Belgium

    Dirk Van den Poel

  3. University of Marburg Databionics, FB 12, Marburg, Germany

    Alfred Ultsch

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Rutkowska-Ziarko, A. (2013). Fundamental Portfolio Construction Based on Mahalanobis Distance. In: Lausen, B., Van den Poel, D., Ultsch, A. (eds) Algorithms from and for Nature and Life. Studies in Classification, Data Analysis, and Knowledge Organization. Springer, Cham. https://doi.org/10.1007/978-3-319-00035-0_42

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