Abstract
Nowadays, many quantitative tools exist in portfolio and risk management in order to evaluate a set of investment opportunities, track their performance over time and in the end to evaluate the performance of the entire portfolio. A relatively unknown approach is the Grey Relation Analysis (GRA) approach, developed in the 1980s in order to help when making decisions within modelling of uncertain systems. However, it is still not sufficiently explored in the portfolio and risk management. Thus, this chapter explores the possibilities of using the GRA approach of ranking the stocks in the process of portfolio selection. Two contributions are expected in the chapter. Firstly, a concise and critical overview of the previous applications within the field of portfolio management is provided for the first time in the literature. The second contribution focused on the empirical application of the GRA approach when ranking the stocks based upon the investor’s utility function theory. This research used the first four moments of return distributions when ranking the stocks by using the GRA approach in order to construct portfolios based upon the results. The results indicate that higher moments of return distributions should be taken into consideration in portfolio selection.
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Notes
- 1.
More on Grey Models, GM, can be found in Liu and Lin (2006). These models refer to differential equations which are used to forecast future values of stock prices or indices. Since the methodology is based upon observing a positive sequence of numbers to be forecasted, return series cannot be modelled via GM.
- 2.
Not all companies publish their financial reports on a quarterly basis as well.
- 3.
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Quantile plots of stock returns, compared to normal distribution
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Škrinjarić, T. (2021). Grey Incidence Analysis as a Tool in Portfolio Selection. In: Zopounidis, C., Benkraiem, R., Kalaitzoglou, I. (eds) Financial Risk Management and Modeling. Risk, Systems and Decisions. Springer, Cham. https://doi.org/10.1007/978-3-030-66691-0_6
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