stock selection by using hierarchical risk parity method and minimum spanning tree based on correlation coefficients matrix in the 50 most active companies of Tehran Stock Exchange

Articles in Press

Document Type : Research Paper

Authors

1 Financial Engineering Dept., Faculty of Accounting and Finance, College of Management, University of Tehran.

2 Assistant Prof. Department of Financial Engineering , Faculty of Accounting and Finance, College of Management ,University of Tehran

3 Master's degree in Finance, Banking, University of Tehran

Abstract

Portfolio optimization is a key challenge in financial investment. This study evaluates the performance of a proposed stock selection model for the Tehran Stock Exchange, comparing it with the market index and the Markowitz approach using statistical tests. Portfolios were constructed using the Hierarchical Risk Parity (HRP) method and marginal asset selection, based on two different correlation matrices. These portfolios were rebalanced semiannually according to correlation coefficients and the composition of the Top 50 Active Companies Index. The results show that the HRP approach with asset selection generally outperforms both the index and the Markowitz model in terms of portfolio performance, observed across various market conditions, including both recessions and booms. Statistical tests confirm the significant superiority of this method over the Markowitz approach. Additionally, this research achieved effective diversification in the Tehran Stock Exchange with fewer assets compared to other methods. The main innovation lies in using two distinct correlation matrices and applying two novel methods for asset weighting and selection, offering practical insights for both individual and institutional investors.

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Journal of Asset Management and Financing

Articles in Press, Accepted Manuscript
Available Online from 29 November 2025

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