Stock Selection Based on Discriminant Analysis: Case of Capital Market of Bosnia and Herzegovina

The main goal of this paper is to scientifically examine and propose new approach of stock selection and analysis based on multivariate technique, i.e. discriminant analysis, in order to help investors, individual and institutional, in their decision making process, especially in case of underdeveloped capital markets. Therefore, in this paper we investigate the cross-sectional relation between the independent variables of the model, comprised of beta coefficient and some fundamental variables as well as the average stock returns on the underdeveloped capital market of Bosnia and Herzegovina. We concluded that discriminant analysis is a useful quantitative tool that can help investors in shaping their investment strategies. We also found that the beta coefficient, market capitalization and realized historical return have discriminatory capabilities in case of the capital market of Bosnia and Herzegovina. The real implications of this research can be seen in the shaping of investment strategies of potential investors looking to diversify their portfolios. The main limitations of this study are to be found in the shorter available financial time series in newly formed capitalistic economy, missing data due to the lack of collective records on levels of securities offerings issues.