The Relationship between the Stock Returns and the Financial Ratios in Borsa Istanbul Analysed by the Classification Tree Method

Abstract

The factors affecting the stock returns have been reported in several studies that provided different results depending on the country. The previous studies that were conducted about Borsa Istanbul (BIST), which is the stock exchange in Turkey are mostly based on regression analysis, and mainly covers the BIST 100 Index. This study included all of the businesses in BIST, and the expected returns were calculated using the capital asset pricing model. Using the classification tree method, the differentiation in the financial ratios and stock returns lower or higher than expected has been identified. This study indicates that the realised returns which are different from expected stock returns can be obtained using ROE, earnings per share for five years, equity ratio, and short-term liabilities/net sales. These financial ratios can be useful to determine to estimate stock return and make a profit.