Construction and Back-Testing of an Indexed Portfolio by Using Constrained Regression with Transaction Costs, Weight Constraints, and Asset Turnover in the Iranian Capital Market

This paper considers ۵ large stocks for retail investors and ۱۴ stocks that cover almost the entire market for institutional investors to build an indexed portfolio. This research uses a constrained regression approach to build this portfolio for a ۱-year and ۲-year period, taking into account real-world constraints including transaction costs, asset turnover in the portfolio, and weight constraints. First, the companies under study are introduced, and then their performance over the entire period is examined. Second, the portfolio weights are updated in ۲۱-day periods for one year and two years. Third, a t-test is run to statistically evaluate the performance of this portfolio with the overall index. The results show that in the two-year and one-year periods, these portfolios have statistically significantly outperformed the overall index. It seems that by balancing the portfolio weights in a periodic manner, one can achieve better performance than the overall index. Therefore, this approach can be suitable for retail and institutional investors.

Keywords:

Constrained Regression , Indexed Portfolio Construction , Market Outperformance , Portfolio Rebalancing , transaction costs