Construction and back-testing of stock portfolios considering transaction costs, weight constraints, and asset turnover in the Iranian capital market for foreign investors

This paper considers 5 large stocks for retail investors and 14 stocks that cover almost the entire market for institutional investors to build stock portfolios. This research uses the Black-Letterman, Sortino ratio maximization, equal weights, and constrained regression approaches to create these portfolios, considering real-world constraints including transaction costs, asset turnover in the portfolio, and weight constraints. The results show that in the two-year and one-year periods, these portfolios have statistically significantly outperformed the overall index. Therefore, these approaches can be suitable for foreign retail and institutional investors. However, there was no significant relationship between the different models. Of course, this is probably due to asset weight limitations. When we removed this restriction, there was a significant difference in performance between the best model and the worst model. The results also showed that active management could perform better than passive management in the Iranian capital market.