Stock indices related to specific economic sectors play a major role in portfolio diversification. Notwithstanding its importance, the traditional sector classification shows several flaws and it may not be able to properly discriminate the risk-return profile of financial assets. We propose a latent class approach in order to correctly classify the stock companies into homogenous groups under risk-return profile and to obtain sector indices which are consistent with the standard portfolio theory. Our results allow to introduce a methodological dimension in the stock's classification and to improve the reliability of sector portfolio diversification. © Springer-Verlag Berlin Heidelberg 2011.
CITATION STYLE
Costa, M., & De Angelis, L. (2011). Sector classification in stock markets: A latent class approach. In Studies in Classification, Data Analysis, and Knowledge Organization (pp. 229–236). Kluwer Academic Publishers. https://doi.org/10.1007/978-3-642-13312-1_23
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