Portfolio Choice Using Additional Information from Financial Statements - Evidence from the Frankfurt Stock Exchange

Classical portfolio construction models consider only the information contained in the market prices of stocks, but ignore the financial performance of companies. Typically, the variance is used as the dispersion parameter. This symmetric measure of risk may be inadequate if the distribution of returns differs significantly from the normal or symmetric distribution. With this in mind, we introduce some additional portfolio selection criteria based on companies' financial performance. In addition, we consider semi-variance as an alternative risk measure to variance. The main research objective is to develop a classical portfolio theory by incorporating firms' financial indicators and using semi-variance as a measure of investment risk. In the paper a novel method for portfolio selection has been proposed and we have developed an original computer code to find the efficient three criteria portfolios. A set of 13 types of portfolios was constructed, differing in terms of fundamental values and risk measures. The proposed models were evaluated under the condition of an economic crisis caused by the COVID-19 pandemic. The research sample consisted of the largest companies listed on the Frankfurt Stock Exchange, the DAX 30 index. The research showed that the highest returns were observed for portfolios based on indicators related to the financial condition of the companies. These types of portfolios were also characterized by the highest level of risk, as measured by variance and semi-variance. The analysis thus confirms the usefulness of corporate financial indicators in portfolio decisions and points to the need for further research in this area.