Diversification in stock portfolio is always desired to minimize the risk. One of the many ways is to cluster these stocks into many categories in which each category exhibits similar behavior.

Here are a few categories I identified with some stocks by applying simple clustering algorithm.

Category 1

Category 2:

Category 3:

Category 4:

In the experiment, I tried with different number of clusters and calculated its corresponding cost. See the following chart, I chose 15 as the ideal number of clusters to cluster 93 stocks I have in the portfolio.

The main goal of this exercise is to build a balanced portfolio with combination of stocks from different categories to minimize risk.

Disclaimer: Trading is risky and you can lose all money. Past performance is not a guide to future performance. The content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis and consult a financial professional’s advice to verify our content. It is very important to do your own analysis before making any investment based on your own personal circumstances.