Clustering of NSE Indices using Dendrograms and KMeans Algorithm

Investors usually willing to park their funds in the stocks which gives them good returns with less risk. Whatever may be the financial position of the investor, he/she will be interested to invest in the stocks with less risk and higher return. With proper analysis, financial analysts will be identifying the stocks with the above qualities. In this process, analysts may use different charting or plotting techniques. After identifying that, they suggest investors to invest in single or multiple stocks depending upon their required Return and Risk pattern. This has lead to the concept of diversification. There are some investors who usually select some indices for mitigating the risk. Individual stocks may be at a higher risk but a bunch of stocks may be at a lesser risk is the concept behind selecting the index. Initially some mathematical formulae have been used to construct the portfolios to achieve diversification. Now the concept of Machine Learning has been included in construction of portfolios by many companies, since then lot of people attempted to categorize the assets, stocks, indices into different groups usually referred to as Clusters. There are many ways of clustering and KMeans clustering is one of the powerful ways of clustering the entities.