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Stock Selection with Principal Component Analysis

Libin Yang, William Rea and Alethea Rea

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: We propose a stock selection method that is based on a variable selection method used with principal component analysis. We applied our method to stocks in the ASX200 and show that a portfolio of as little as 15 stocks can closely replicate the behaviour of the index. We show that the number of stocks required to form a diversified portfolio is not constant across time but varies with market conditions.

Keywords: Principal component analysis; stock selection; diversification; stock portfolios (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-02-03
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (5) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:15/03

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