Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market
Adjusting investment strategy is one of the ways to handle dynamic market conditions. This study proposes a novel portfolio management strategy using appropriate optimization objectives for different stock market trends while also incorporating market trends and stock return predictions The optimiza...
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| Format: | Article |
| Language: | English |
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LLC "CPC "Business Perspectives"
2024-08-01
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| Series: | Investment Management & Financial Innovations |
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| Online Access: | https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/20603/IMFI_2024_03_Clarissa.pdf |
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| _version_ | 1832543782281674752 |
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| author | Adeline Clarissa Deddy Priatmodjo Koesrindartoto |
| author_facet | Adeline Clarissa Deddy Priatmodjo Koesrindartoto |
| author_sort | Adeline Clarissa |
| collection | DOAJ |
| description | Adjusting investment strategy is one of the ways to handle dynamic market conditions. This study proposes a novel portfolio management strategy using appropriate optimization objectives for different stock market trends while also incorporating market trends and stock return predictions The optimization objectives that will be evaluated for different market trends are maximizing the Sharpe ratio, minimizing risk, and minimizing expected shortfall. This study utilizes simulation modelling with various predictive models on building the portfolios. The results show that, in an upward market trend, the strategy is to choose stocks with positive returns, and the objective is to maximize the Sharpe ratio. The portfolio that follows this strategy during upward market trends has greater returns than both the Indonesian Composite Index and LQ45, which serve as stock market benchmarks, with 90% certainty. Meanwhile, during the downward market trend, the strategy is to choose stocks with a negative correlation with the Indonesian Composite Index, and the proper optimization objective is to minimize risk. A portfolio that follows this strategy during downward market trends has greater returns than stock market benchmarks with 95% certainty. Across the evaluation period from 2018 to 2023, the portfolio using the proposed strategy outperforms both stock market benchmarks, with a higher quarterly Sharpe ratio of 0.3047 and cumulative return of 107.90%. The proposed portfolio has a higher quarterly return than the stock market benchmark with 99% certainty. Therefore, the proposed strategy shows a promising result in a dynamic market. |
| format | Article |
| id | doaj-art-83187b9bb234417ebdec94f92bb396ed |
| institution | Kabale University |
| issn | 1810-4967 1812-9358 |
| language | English |
| publishDate | 2024-08-01 |
| publisher | LLC "CPC "Business Perspectives" |
| record_format | Article |
| series | Investment Management & Financial Innovations |
| spelling | doaj-art-83187b9bb234417ebdec94f92bb396ed2025-02-03T11:32:35ZengLLC "CPC "Business Perspectives"Investment Management & Financial Innovations1810-49671812-93582024-08-0121330431610.21511/imfi.21(3).2024.2520603Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic marketAdeline Clarissa0https://orcid.org/0009-0005-9701-5915Deddy Priatmodjo Koesrindartoto1https://orcid.org/0000-0003-2445-822XMSM Student, School of Business and Management, Bandung Institute of Technology, IndonesiaAssociate Professor, School of Business and Management, Bandung Institute of Technology, IndonesiaAdjusting investment strategy is one of the ways to handle dynamic market conditions. This study proposes a novel portfolio management strategy using appropriate optimization objectives for different stock market trends while also incorporating market trends and stock return predictions The optimization objectives that will be evaluated for different market trends are maximizing the Sharpe ratio, minimizing risk, and minimizing expected shortfall. This study utilizes simulation modelling with various predictive models on building the portfolios. The results show that, in an upward market trend, the strategy is to choose stocks with positive returns, and the objective is to maximize the Sharpe ratio. The portfolio that follows this strategy during upward market trends has greater returns than both the Indonesian Composite Index and LQ45, which serve as stock market benchmarks, with 90% certainty. Meanwhile, during the downward market trend, the strategy is to choose stocks with a negative correlation with the Indonesian Composite Index, and the proper optimization objective is to minimize risk. A portfolio that follows this strategy during downward market trends has greater returns than stock market benchmarks with 95% certainty. Across the evaluation period from 2018 to 2023, the portfolio using the proposed strategy outperforms both stock market benchmarks, with a higher quarterly Sharpe ratio of 0.3047 and cumulative return of 107.90%. The proposed portfolio has a higher quarterly return than the stock market benchmark with 99% certainty. Therefore, the proposed strategy shows a promising result in a dynamic market.https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/20603/IMFI_2024_03_Clarissa.pdfIndonesiaportfolio managementreturn predictionstock market trend |
| spellingShingle | Adeline Clarissa Deddy Priatmodjo Koesrindartoto Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market Investment Management & Financial Innovations Indonesia portfolio management return prediction stock market trend |
| title | Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market |
| title_full | Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market |
| title_fullStr | Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market |
| title_full_unstemmed | Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market |
| title_short | Strategic portfolio rebalancing: Integrating predictive models and adaptive optimization objectives in a dynamic market |
| title_sort | strategic portfolio rebalancing integrating predictive models and adaptive optimization objectives in a dynamic market |
| topic | Indonesia portfolio management return prediction stock market trend |
| url | https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/20603/IMFI_2024_03_Clarissa.pdf |
| work_keys_str_mv | AT adelineclarissa strategicportfoliorebalancingintegratingpredictivemodelsandadaptiveoptimizationobjectivesinadynamicmarket AT deddypriatmodjokoesrindartoto strategicportfoliorebalancingintegratingpredictivemodelsandadaptiveoptimizationobjectivesinadynamicmarket |