Stock selection with principal component analysis

Alethea Rea, Bill Rea, Libin Yang
2016 The Journal of Investment Strategies  
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.
doi:10.21314/jois.2016.067 fatcat:z5ulkbm7wjbmlaetxjfq3pjmt4