Abstract—Expectations of economic agents about the upcoming business conditions can strongly influence pace and intensity of future economic developments. Amidst the time of crisis, business subjects are risk averse, waiting for better times and for the turmoil to calm down. Because of the losses suffered, their sentiment is very pessimistic which hinders them from active business participation. Theories show that individuals are even ready to reject an investment that has a positive risk premium because the potential gain is insufficient to make up for the risk involved. By doing so, they prolong the crisis even longer. In such situations it is important to protect potential investors against further losses as it is the only thing that can serve as a guarantee of increased optimism that could lead to economic recovery. This paper explores the sentiment of economic agents amidst the time of crisis and consequently focuses on problem of portfolio optimization. Since optimization is based on robust data and excludes emotions out of the equation, results of it should be objective and may help turning investors’ pessimistic sentiment into more optimistic one. Securities that make up the most relevant Croatian stock exchange index, namely Crobex 10 have been chosen for the analysis. We analyze expected rates of return and portfolio risk and give recommendations to investors on how to choose optimal portfolio and minimize inherent risk.
Index Terms—Risk, stock market, Croatia.
Zoran Wittine is with the Faculty of Economics and Business, University of Zagreb, Croatia (e-mail: firstname.lastname@example.org ).
Cite:Zoran Wittine, "Between Sentiments and Fundaments - Analysis of Risk and Non-Linear Optimization of the Croatian Stock Market Index," International Journal of Trade, Economics and Finance vol. 4, no. 3, pp. 124-128, 2013.