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

Younes Berouaga (), Cherif El Msiyah and Jaouad Madkour
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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

IJFS, 2023, vol. 11, issue 2, 1-20

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.

Keywords: portfolio optimization; Minimum Spanning Tree; Moroccan Stock Exchange market; graph theory (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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