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Portfolio Optimization Using Minimum Spanning Tree Model in the Moroccan Stock Exchange Market

Author

Listed:
  • Younes Berouaga

    (National School of Commerce and Management, Ibn Tofaïl University, Kenitra 14000, Morocco)

  • Cherif El Msiyah

    (National School of Commerce and Management, Moulay Ismail University, Meknes 50000, Morocco)

  • Jaouad Madkour

    (Faculty of Economics and Management, Abdelmalek Essaâdi University, Tetouan 90000, Morocco)

Abstract

Portfolio optimization is a pertinent topic of significant importance in the financial literature. During the portfolio construction, an investor confronts two important steps: portfolio selection and portfolio allocation. This article seeks to investigate portfolio optimization based on the Minimum Spanning Tree (MST) method applied on the Moroccan All Shares Index (MASI) historical stock log returns covering the period from 2 January 2013 to 27 October 2022 allowing us to build two portfolios: MST-Portfolio and MST-Portfolio 2. Portfolio selection was carried out for MST-Portfolio and MST-Portfolio 2, respectively, based on 63 stocks or using the Degree Centrality (DC) measure and portfolio allocation for both portfolios was carried through the use of the Inverse Degree Centrality Portfolio (IDCP). The obtained portfolios were compared with the Minimum Variance Portfolio (MV Portfolio) and Equal Weighting Portfolio (EW Portfolio) using centrality measures, diversification, and backtesting. According to the used indicators analysis, MST-Portfolio and MST-Portfolio 2 are the most well-performed and robust portfolios showing a good performance during the studied period, even during the COVID-19 crisis, and ensuring a good level of diversification. The findings demonstrate that both suggested methods can enhance portfolio performance, evidence that can help investors or active managers when optimizing their portfolios.

Suggested Citation

  • Younes Berouaga & Cherif El Msiyah & Jaouad Madkour, 2023. "Portfolio Optimization Using Minimum Spanning Tree Model in the Moroccan Stock Exchange Market," IJFS, MDPI, vol. 11(2), pages 1-20, March.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:2:p:53-:d:1104772
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60(2), pages 151-151.
    2. Roncalli, Thierry, 2013. "Introduction to Risk Parity and Budgeting," MPRA Paper 47679, University Library of Munich, Germany.
    3. H S Ryoo, 2007. "A compact mean-variance-skewness model for large-scale portfolio optimization and its application to the NYSE market," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(4), pages 505-515, April.
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    Cited by:

    1. Imran Ansari & Charu Sharma & Akshay Agrawal & Niteesh Sahni, 2024. "A novel portfolio construction strategy based on the core-periphery profile of stocks," Papers 2405.12993, arXiv.org.

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