Stock investment remains a strong alternative earning opportunity (HM Sami et al., 2022). Financial ratios play a critical role in making effective stock selections based on the performance parameters of these ratios (Sami HM, 2021). Technical indicators have also suggested effective methods to create an efficient portfolio with higher returns than general market return standards (HM Sami et al., 2023). Despite the worldwide depth of stock markets, Indian markets remain unhinged by heavy financial changes (Kumar et al., 2023). Moreover, the US treasury surge led to a loss in the Indian market in the year opening (Agarwal, R., 2023). However, the threat of a US market shutdown led to a win in Indian stock market growth for the year 2023 (Agarwal, R., 2023). 

Similarly, Indias October to December FMCG growth led to vibrant support for the Indian stock market (Chakraborty, O. 2023). In comparison to overall world inflation, it was observed that the Indian stock market remained less volatile, with more opportunity for sustainable growth (Goyal, A., 2020). With a reassuring outcome from an Indian economic perspective concerning her neighboring counterparts, we observe that the Indian stock market remains remarkably stable based on the standard deviation of price movements and sustainable growth. Consequently, the NSE stocks portray the lower risk involved with attaining effective gain (Venkatesh et al., 2021). We have only considered large-cap stocks for our research, which will highly correlate with market movement. We have also considered the financial ratios of these stocks. 

Our research would only consider stocks from an excellent financial standpoint for investment purposes (Wibagdo et al., 2020). This experiment considers technical indicators important after primary selection by financial ratios. Our research aims to emphasize the importance of EPS, current ratio, and P/E ratio as the basis for selection. We also emphasize the importance of MACD in determining the buy or sell signal of stocks. The research data corpus would test stock price rises for the next 10 days. We researched to determine a portfolio performance that will provide a Sharpe ratio return greater than 1 based on stock selections using both financial ratios and technical indicators.

Research Motivation

The experimentation is motivated to deliver the following aspects in general:

a) The selected assets are evaluated based on standard financial ratios and conventional aspects of technical indicators. If the assets are justified using technical indicators with standard features, then the general public can consider investing and retaining secondary earnings based on standard investment parameters.

b) Moreover, open-source knowledge could be helpful for investment in the stock market and provide additional earnings for stock market investors.

c) A market return that generates a higher return than risk-free returns will allow stock investments to be a better investment alternative. Hence, reliability on standard technical indicators and a suitable financial ratio would contribute to a better investment alternative.

Research Objective

The research aims to create portfolio-based returns using stocks based on their technical indication results and financial ratios. Based on our main objective, we will emphasize the following issues:

a) Proving the effectiveness of technical indicators for stock selection as well.

b) Proving the effectiveness of financial ratios for selection

c) Applying the selected stocks for investment purposes to generate a positive portfolio return.

d) The portfolio return needs to generate a return that will be a better alternative to a risk-free return.

The financial ratio remains an essential criterion for stock selection. Adam has proven that for investment purposes, EPS, current ratio, and P/E remain important investment alternatives (MHM Adam, 2014). Although Sami has proven that by using EPS and current ratios, we can make successful stock selections, there has yet to be any proof regarding investment success in the study (Sami HM, 2021). Moreover, in our research on the Dhaka stock exchange, a very volatile stock market with comparatively fewer stocks, we have observed success in stock selection using financial ratio analysis (Sami HM et al., 2021). Sami et al. have only mentioned that their predictions were effective because of effective financial ratio-based selections, but their research did not perform any selection based on technical indicators (Sami HM et al., 2021). To predict the effectivity of financial markets, Sami et al. also performed one more study on 07 different stock exchanges, utilizing technical indicators on MACD and RSI (Sami et al., 2022). The stocks are selected as vital market indicator parameters based on their market capitalization, price movements, and technical parameters. In this research, we specifically emphasize the portfolio performance of selected stocks from both a financial ratio standpoint and a technical indicator of success. We also needed to perform research on a statistically independent stock index, which has been successful in the Indian stock index (Khan et al., 2011). Our experimentation further proceeded to prove if the selected stocks had been able to indicate better market performance based on portfolio-based returns. Hasan & Arifuzzaman have proved that by using LSTM, we can effectively predict stock prices while using the portfolio optimizer of PyPortfolioOpt as a vital optimization tool for reducing risk and gaining an effective return (Hasan & Arifuzzaman, 2021). In this research, we did not perform prediction, but we performed stock selection based on both financial ratios and technical parameters like MACD4 and RSI5. EPS1 remained a critical criterion for the selection of stocks. The current ratio2 also performs the vital task of selecting stocks based on the leveraging ratio. Finally, the P/E ratio is essential in selecting stocks for investment purposes.

Moreover, NSE remained a statistically significant stock exchange due to the large number of stocks and the stable financial condition in India (Dhali & Singh, 2020). This study did not look at unsupervised learning-based selection by technical indicators or financial ratios, but it did come up with suggestions for choosing stocks based on majority success (Jais et al., 2012). The research accompanies the following GAP analysis to motivate and define the research.

Table 1: Relevant Research & Gap Analysis.

Based on the previous research, we concluded that, despite all of this research, no one has tried to make suggestions about choosing stocks based on both MACD and RSI signals for price increases that have good financial ratios and good portfolio performance. It finally depicts that our research should suggest success for stocks with an effective price rise that can offset the growth of risk-free gain.

The following steps accompany the research:

1) Selection of Stocks from NSE: Our research would involve selecting stocks that are representative of NSE 100 and would remain a firm representative of large-cap stocks.

2) In order to select these stocks, we would also indulge in stocks with lower prices. In this research, we utilized portfolio optimization, proposing a suggestive stock portfolio to ensure a higher return with a smaller investment margin. We considered stocks with prices ranging from rupee 500 to rupee 1500.

3) From the NSE100, our selected stocks had an acceptable financial ratio. After good financial ratio indication, we performed MACD, RSI, and Bollinger Band-based analysis to successfully predict stocks that were supposed to perform well during our testing period.

4) Based on empirical selection, we have considered stocks with a technical indication of a price rise. These stocks are used for portfolio-based prediction to effectively identify a mix that will outperform the risk-free return of the market.

Fig. 1: Research Diagram.

In the research process, we have concluded the selection of assets based on the following criteria: Li et al. have designated that an EPS value greater than 1 is a good indicator for stock selection (Li et al., 2021). Similarly, Rahmadi has exhibited a current ratio value greater than 1 but less than 2 to be perfect for investment (Rahmadi, Z.T., 2020). Moreover, industry relevance to the P/E ratio plays a pivotal role in selecting assets for investments (Guerard et al., 2015). The following diagram describes the benchmark for financial ratio selection.

Fig. 2: Current Ratio, EPS & P/E Ratio.

 

Technical indicators play an efficient role in financial investment through price movement indications (Wang & Kim, 2018). Wang & Kim also showed that the MACD line is greater than the signal line, indicating a potential for future price gain with higher earning potential. Gumparthi has shown that the indicative rise from 60 to 70 and the drop from 40 to 30 indicate overbuy and oversold signals (Gumparthi, S. 2017). Laugico et al. have shown how the Bollinger Band influences the selection of stocks for trading.

Fig. 3: Technical Indicators and Parameters.

Portfolio Optimization depends on minimizing the risk of investment by increasing assets for investment (Sami et al., 2023). Moreover, it increases the investment outcome by selecting assets with a lower standard deviation. In this research, we focus on applying the theoretical concept of efficient frontier for reducing investment risk by involving assets with reasonable indications for investment by both technical indicators and financial ratios.

We have selected 7 stocks from the NSE 100 index. These stocks are strong market indicators and are well-responsive to market movements. Our research accompanies portfolio performance in coherence with well-performing market-suiting stocks. Our research criterion accompanies stocks with 3 financial ratio parameters where the current ratio is greater than 2, EPS is positive, and the P/E ratio is less than the industry P/E. Similarly, this research accompanies a minimum of 2 technical analyses suitable for the rise in stock prices, considering it positive. However, in our cases, we considered all of them. Henceforth, there is growth accompanying all of the stocks shown in the table below on our tested ten days, starting from 1/31/2022 to 2/10/2022.

Table 2: Justifications.

Moreover, we accompany the stocks that have greater than 2 current ratios but we considered them as they potentially have more assets than liabilities. Our research emphasized the performance of portfolios that provide significant performance through effective market returns higher than the savings account return rate. Gautam and Kalyan have suggested that the long-term bond yield rate remains the riskless earning for Indian investors (Gautam & Kalyan, 2018). Similarly, Pandow and Butt have suggested that a risk-free return plays a crucial role in making investment decisions (Pandow & Butt, 2017). Our research would focus on making returns more significant than 7.135% for 1 year. Hasan & Arifuzzaman have shown that in an efficient portfolio7, a Sharpe ratio6 value greater than 1 ensures more return than risk (Hasan & Arifuzzaman, 2021). Finally, we will assign a portfolio that would generate a more significant than 7.135% return for 1 year using the selected assets. The following diagram describes it below:

Fig. 4: Process diagram.

In this research, we have accumulated stocks that have all acceptable financial ratios. These ratios play a key role in the acceptance of assets for investment.  The following table provides the financial ratio of selected stocks:

Table 3: Financial ratios. 

After considering these assets through the basis for financial ratios we performed a technical analysis of these assets. Our performance analysis suggested that the same 7 stocks are showing positive price growth suggestion in at least two among three parameters. Hence, we considered these stocks for portfolio optimization.

Table 4: Financial Indicators.

Fig. 5: Calculation of portfolio variance, volatility, and annual return.

Research Outcome

Our experimentation thus focuses on outperforming the standard market returns by conventional financial theory and MACD and RSI suggestions for stock price rise observation. Finally, technical analysis also helps us understand stock movements better. We found an approximate gain of Rs.2983.20 with a portfolio variance of 0.001128, portfolio volatility (standard deviation) is 0.03359, and annual portfolio return of 0.0740 or 7.4% (approximately).

Fig. 6: Portfolio Optimization Outcome.

Fig. 7: Discrete Allocation.

Fig. 8: Sharpe Ratio Generation.

It is shown in the picture that, the expected annual return is 4633.5%, the annual volatility is 11.6% and the sharp ratio is 398.94 approximately.

Drawbacks

1) Navigating many financial variables and risk factors to define an optimally risky portfolio is complex. One must understand market dynamics, investor preferences, and the ever-changing economy to balance potential returns and tolerable risk. A clear definition is needed to emphasize the complexity of building a portfolio that optimizes returns while meeting an investors risk tolerance and financial goals. Thus, an optimal risk portfolio is unclear.

2) The portfolio perspective of the investment strategy needs more explanation. Withers may need to explain this perspective to choose and manage portfolio assets. Investors need a clear portfolio perspective to make informed decisions and improve investment transparency and accessibility. Thus, the portfolio perspective is not extensively discussed.

3) Stock price forecasting is essential for strategic planning, so excluding it from investment creates a gap. Forecasting helps investors capitalize on opportunities and reduce risk by adapting their portfolios to market changes. Resilient stock price prediction can help investment strategies identify patterns, reduce risks, and capitalize on opportunities, improving portfolio management with knowledge and proactive decision-making. Future stock price forecasts are discontinued.

In conclusion, technical analysis and financial ratios remain powerful indicators for stock selection and investment. In an optimized portfolio, we see the inclusion of 4 stocks with a Sharpe ratio value greater than 1. We also conclude that the overall return in 8 days in a minimum-variance portfolio is Rs. 2983.305, which indicates that in an 8-day empirical study based on standard financial and technical parameters, we can make a return of nearly 8.5% with an annual return capability of 4.63 times the original investment. Hence, financial ratios and technical analysis help generate good portfolio performance. 

H.M.S.: Conceptualization, visualization, and contribution in investigation. M.H.B.: writing and checking the manuscript, investigation, editing, and funding acquisition. A.K.M.: writing the manuscript, investigation, and funding acquisition. M.B.H.: writing the manuscript, investigation, and funding acquisition. All the authors who are involved in this research read and approved the manuscript for publication.

The authors would like to thank the Correspondence, Hasan M Sami, Senior Lecturer, School of Business and Economics, North South University, for his support in this research.

There is no conflict of research for this study.