Index tracking fund enhancement using evolving multi-criteria fuzzy decision models

Abstract

An Index Tracking fund is designed to achieve similar investment performance to a market index by holding a portfolio of stocks in which each is weighted with consideration of its corresponding index weight. An ideal index tracking fund is exposed solely market risk. An enhanced index tracking fund should maintain a similar level of risk exposure through a high level of diversification (investing over a sufficiently wide base of assets) with a higher return on investment. In the approach suggested here, technical and fundamental valuation models found using an evolutionary fuzzy system provide enhancement by recommending under or over weighting some stocks in an index tracking portfolio.