Eveloping a Heterogeneous Decision‑Making Framework Based on Mathematical Modeling for Stock Portfolio Selection with an Emphasis on the Relative Valuation of Industries in the Iranian Capital Market

Abstract

Optimal portfolio selection has always been one of the fundamental decision-making problems in the field of investment. In this regard, industry heterogeneity and differences in firms’ financial structures increase the complexity of this decision-making process and highlight the necessity of value-oriented and systematic approaches. The present study aims to propose a heterogeneous decision-making framework based on mathematical modeling for stock portfolio selection, with an emphasis on the relative valuation of industries in the Iranian capital market. The statistical population of the study consists of companies listed in the first and second markets of the Tehran Stock Exchange, as well as the first and second markets of the Iran Fara Bourse, that entered the capital market prior to 2018. The research data include corporate financial statement information and financial ratios, which were extracted from official databases over the period 2018–2022. In total, 420 stocks from 42 different industries were examined.In the first step, a value function was calculated for each stock based on a set of financial criteria. Subsequently, the final value of each stock at the industry level was determined using the relative mean of the ​  index. This index was employed as a measure to assess the relative attractiveness of stocks. In the next stage, stocks with higher attractiveness were incorporated into a mathematical optimization model, and the optimal portfolio was constructed with the objective of risk minimization. The results indicate that stocks with higher relative mean values in the value function make a more significant contribution to the optimal portfolio, and the proposed framework is capable of providing a balanced combination of stocks belonging to heterogeneous industries with a risk-control-oriented approach.

Keywords: Optimization, Stock Portfolio, Value Function, Risk, Capital Market