Determining the optimal stock portfolio using the knapsack model considering risk and stock classification

Abstract

Choosing the investment portfolio is one of the important topics in the field of investment management. The closer the modeling assumptions and conditions for choosing and optimizing the investment portfolio are to the real world conditions, the more reliable the results will be for obtaining profit. In making investment decisions, risk and stock return are very important and are the basis of investment. In fact, a logical relationship should be established between these two so that the desired stock return is met and the risk is controlled at the same time. Today for investors, risk management is as important and vital as obtaining maximum return because with the wrong allocation of assets, proper return is not obtained and finally the investor is forced to leave the market at a loss. One of the main challenges in determining the optimal stock portfolio is deciding on the amount and method of asset allocation. In this research, the backpack model has been used to select the type of stock and the purchase amount of each stock. Also, the important factor of risk has been considered in the presented model by taking into account things such as the amount of risk taking of people, applying the prices in an interval and the stock classification. Finally, in order to verify the validity of the presented model, the model was used to determine the optimal stock portfolio for the Tehran Stock Exchange, and sensitivity analysis was performed on some of the important parameters of the model.