PORTFOLIO ANALYSIS WITH SECOND ORDER STOCHASTIC DOMINANCE BY THE PERSPECTIVE OF CAPITAL STRUCTURE: AN IMPLEMENTATION ON BIST-100 INDEX

Abstract

Purpose- The aim of this paper is to observe whether generating a portfolio having return more than index by investigating the return performance of index’s stocks and capital structure of firms in index in a certain period. The second aim of this paper is to provide portfolio diversification by using the method of this study. In this paper, firms and stocks on BIST-100 index are referenced for empirical study.

Method- Stocks are chosen from BIST-100 index with regard to certain capital structure of firms in stocks, and second orderly stochastic dominance test is implemented on these stocks. Dominant stocks are defined to generate a portfolio after stochastic test and this portfolio’s return performance is compared to the index’-s return.

Findings- The portfolio, whose stocks are filtered by a certain capital structure and then chosen by second orderly stochastic dominance test, has return performance better than index’s return.

Conclusion- This paper is indicating that second orderly stochastic dominance method and capital structure is an important investigation to generate a portfolio having higher returns more than index’s.

Keywords

• Capital structure,second order stochastic dominance,portfolio analysis,D/E ratio,returns over index

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