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A Cluster Representative Selection Method for Stock Portfolio Based on Efficient Frontier

Portfolio is a financial concept to combine several stocks to reduce the risks and improve the profits. To choose the basic members of portfolio, we can group similar stocks into one cluster and then choose representative stock from each cluster. In this paper, we focus on the method of choosing representative stocks in clusters. The ordinary representative of a cluster is often the center of that cluster. We propose a new cluster representative method MDR (maximum distance representatives). In our method MDR, we choose the stocks which has maximum distance with other representatives. MDR can construct a more diverse portfolio than center method. The effectiveness of cluster representative selection methods can be evaluated by an index IBEF based on the concept of efficient frontier. Our experiments show that MDR can effectively improve the efficient frontier, which means MDR can bring more profits than center representative method at the same risk level.