Using Residual Income Model as a Measurement of Portfolio Selection

In modern financial theories, factors that should be considered for portfolio optimization problem are very important. In this study, first residual income model is used for valuation of companies. Then valuated companies are discriminated and two groups are created. The companies that their value is more than their market price are placed in first group and other companies are placed in second group. A portfolio optimization model is written for each group and two efficient frontiers are obtained. A hypothesis test is defined for comparison of efficient frontiers in different risk levels. To implement this methodology 92 companies that were accepted in Tehran Stock Exchange are selected in a random sampling. Results show the companies that their value is less than their market price are not necessarily inefficient. On the other hand, results show the residual income model can be a measurement for portfolio selection process if the risk level is determined.