The Process of Stock Portfolio Construction with Respect to the Relationship between Index, Return and Risk Evidence from Turkey¹

In order to demonstrate the effect of the relationship between the elements of index, return and risk on the overall process of portfolio construction by the investors, this study has constructed portfolios with returns equal to and higher than the ISE (Istanbul Stock Exchange) National-100 Index employing the Quadratic Programming Model. Moreover, by applying the Multi Dimensional Scaling Analysis, the portfolios were located in perceptual space, which helped demonstrating the portfolios that are similar and dissimilar in this respect. In the process of portfolio construction, the researcher selected stocks of an annual number of 30 firms publicly-traded in the ISE (Istanbul Stock Exchange) National- 100 Index during the period August 2004 -August 2007. Employing the data on the daily closing values of these firms and of the ISE National-100 Index, average weekly returns for each stock and the index were calculated for 156 weeks, 17 portfolios were constructed and the obtained analysis results were further subjected to evaluation.