Fuzzy Expert System for Stock Portfolio Selection: An Application to Bombay Stock Exchange

TL;DR

This paper introduces a novel fuzzy expert system for stock selection in BSE, utilizing Dempster-Shafer theory for rule generation and Ant Colony Optimization for portfolio construction, demonstrating effective short-term investment results.

Contribution

It presents a new fuzzy expert system integrating Dempster-Shafer theory and ACO for stock ranking and portfolio optimization in BSE, reducing knowledge base development effort.

Findings

Model performs well for short-term investments.

Effective ranking of stocks using fuzzy expert system.

Portfolio optimization improves investment outcomes.

Abstract

Selection of proper stocks, before allocating investment ratios, is always a crucial task for the investors. Presence of many influencing factors in stock performance have motivated researchers to adopt various Artificial Intelligence (AI) techniques to make this challenging task easier. In this paper a novel fuzzy expert system model is proposed to evaluate and rank the stocks under Bombay Stock Exchange (BSE). Dempster-Shafer (DS) evidence theory is used for the first time to automatically generate the consequents of the fuzzy rule base to reduce the effort in knowledge base development of the expert system. Later a portfolio optimization model is constructed where the objective function is considered as the ratio of the difference of fuzzy portfolio return and the risk free return to the weighted mean semi-variance of the assets that has been used. The model is solved by applying Ant Colony Optimization (ACO) algorithm by giving preference to the top ranked stocks. The performance of the model proved to be satisfactory for short-term investment period when compared with the recent performance of the stocks.