An Effective Approach for the Diverse Group Stock Portfolio Optimization Using Grouping Genetic Algorithm

Abstract

Finding useful portfolios that could be a portfolio of trading strategy or a stock portfolio from financial datasets is always an attractive research topic due to the nature of financial markets. Because investors always want an approach that can continually provide various portfolios, the issue of group stock portfolio optimization (GSPO) has been raised and the algorithms to obtain a group stock portfolio (GSP) have also been described in the past. A GSP divides the whole set of stocks into several stock groups, and the stocks in a group are exchangeable in investment. Thus, when investors are not satisfied with a suggested stock, they can select another stock from the same group to replace the original one. However, the industry diversity of stocks within a group is not regarded in the existing literatures. In this paper, an algorithm for dealing with the diverse group stock portfolio optimization (DGSPO) is proposed to obtain a diverse group stock portfolio (DGSP). The proposed algorithm is based on the group genetic algorithm with the chromosome representation and the fitness function designed for the purpose of finding a good DGSP. Especially, a factor called group diversity is designed to diversify stocks from different industries and is considered in the fitness evaluation. Another factor considers cash dividend is also applied to keep companies with good quality in the portfolio for increasing the profit of a DGSP. Two real financial datasets are used in the experiments to verify the effectiveness of the proposed approach.