Analysis Of The Stock Market Using Quantitative Approach Finance Essay - Free Essay Example

Sample details Pages: 8 Words: 2539 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Quantitative finance started in the U.S. in the 1930s as some astute investors began using mathematical formulas to price stocks and bonds. Harry Markowitzs 1952 Ph.D. Don’t waste time! Our writers will create an original "Analysis Of The Stock Market Using Quantitative Approach Finance Essay" essay for you Create order thesis Portfolio Selection was one of the first papers to formally adapt mathematical concepts to finance. Markowitz formalized a notion of mean return and covariances for common stocks which allowed him to quantify the concept of diversification in a market. He showed how to compute the mean return and variance for a given portfolio and argued that investors should hold only those portfolios whose variance is minimal among all portfolios with a given mean return. Although the language of finance now involves Ito calculus, minimization of risk in a quantifiable manner underlies much of the modern theory. In 1969 Robert Merton introduced stochastic calculus into the study of finance. Merton was motivated by the desire to understand how prices are set in financial markets, which is the classical economics question of equilibrium, and in later papers he used the machinery of stochastic calculus to begin investigation of this issue. At the same time as Mertons work and with Mertons as sistance, Fischer Black and Myron Scholes were developing their option pricing formula, which led to winning the 1997 Nobel Prize in Economics. It provided a solution for a practical problem, that of finding a fair price for a European call option, i.e., the right to buy one share of a given stock at a specified price and time. Such options are frequently purchased by investors as a risk-hedging device. In 1981, Harrison and Pliska used the general theory of continuous-time stochastic processes to put the Black-Scholes option pricing formula on a solid theoretical basis, and as a result, showed how to price numerous other derivative securities. 2.0 Fundamentals of Quantitative Analysis Definition: Quantitative analysis is a process of disseminating financial data in order to make valid projections regarding the future performance of a corporation or market. Quantitative analysis of stocks is done purely based on numbers. In this type of analysis, the price trend of the stock is analyzed based on historical data using complex mathematical calculations and statistical modeling techniques. Quantitative Analyst: A quantitative analyst is a person who works in the financial markets developing and implementing mathematical models to assist the activities of traders and risk managers within investment banks, hedge funds and other financial institutions. Throughout the industry, such professionals are known as quants. Although the original quants were concerned with risk management and derivatives pricing, the meaning of the term has expanded over time to include those individuals involved in almost any application of mathematics in finance. An example is statistical arbitrage. Differentiated Features: The quantitative analysis of stock is very different from fundamental analysis of stocks. Fundamental analysis considers the business, growth prospects and effectiveness of management to determine the value of the stock while quantitative analysis discounts all these factors. The analyst who believes in this technique think that all the above mentioned factors are very subjective and do not portray the exact picture since everyone can interpret these numbers in a different manner. The analysts who believe in quantitative analysis of stocks do not take into consideration the effectiveness of management, business or economy while doing this analysis. Quantitative analysis may also involve such characteristics as company liabilities, sales figures, trading trends, and alike. Unlike qualitative analysis, which may consider more uncertain factors like the quality of management, branding, and intrinsic value, quantitative analysis looks only at me asurable facets. Thus, technical analysis, which employs mathematical models, would be considered part of quantitative analysis. A person who performs quantitative analysis is referred to as hybrid stock analyzed. This is because, he/she is characterized by the attributes of both fundamental and technical analyzed. Purpose: The purpose of quantitative analysis is to employ quantifiable attributes of a particular company in order to determine its securitys or markets value. To do so, quantitative analysis practitioners gather and analyze data such as income statements, company assets, market share, and earnings records. 3.0 Techniques Used in Quantitative Analysis Quantitative analysis in general is simply a way of measuring things. In quantitative analysis of stock, the behavior of a stock is analyzed using complex mathematical and statistical modeling equations. For analysts who specialize in quantitative analysis of a stock, the business or the management mean nothing to them. There is no regard for underlying business at all. All they look for are the numbers. For quantitative analysis, the number crunching is done through advanced computers now days. These people who do this are also called as quants. These quants will do analysis based on complex formula and will decide on sell versus buy option purely based on these equations and numbers. Some of the major considerations while doing quantitative analysis of stock are: Company size First thing which the investors look at is the size of the company. This is usually done in term of capitalization or cap in short. Broadly, the companies are divided into various caps depending upon their market. These are micro cap, small cap, mid cap and large cap. Smaller the cap, riskier is the company since it can go bankrupt very easily. But smaller companies have the chances to grow radically as well. Broadly, the guidelines of distinguishing these caps are: Large cap Tk. 1000 million or more. Mid cap Tk. 500 million to Tk. 1000 million. Small cap -Tk. 250 million to Tk. 500 million. Micro cap Tk. 250 million or less. Criteria based or screen based investing Some analysts use a filter or criteria to select the company which they want to trade on. These criteria are based on quantitative factors. Again this is done using computers since the selection is done pretty fast. Momentum of the company can also be used as a deciding factor. Some companies are just doing well for a few quarters in a row which make people believe that company is in good shape. These companies usually outperform other companies in short run and everyone would like to buy stock of this company. Another interesting topic in quantitative analysis is something called as CANSLIM. CANSLIM is a system pioneered by William J. ONeil that is a hybrid of quantitative analysis and technical analysis. CANSLIM has an interesting acronym. C and A stand for current and annual earnings; N - stands for new (new product or new market); S L stands for small cap and large volumes; I - stands for institutional ownership; and M stands for market momentum. All these aforementioned factors are used to decide buy or sell of a company. 4.0 Modus Operandi of Quantitative Analysis 4.1 Quantitative analysis with respect to trading equities generally includes the following research topics: Annual Reports Financial Statements (Earnings, Revenues, Etc.) Publicly Available Data General Economic Data General Econometric Data 4.2 Quantitative analysis with respect to funds involves evaluating statistical analysis of the trading managers track record. These include: A. Return Analysis Compounded average rate of return Percentage of positive months Consistency Length of Track Record B. Risk Analysis Volatility Measures Standard Deviation Monthly Standard Deviation Annual Standard Deviation Combined upside and downside standard deviation Downside Deviation only Sortino Ratio Drawdowns Maximum Drawdown Depth of Drawdowns Frequency of Drawdowns Time in any given Drawdown Recovery from a Drawdown Reward to Risk Average Return Divided by Maximum Drawdown (Total Return Minus Risk Free Rate of Return)/(The Total of All Drawdowns) (Average Return)/(Maximum Drawdown) Sharpe Ratio: (Average Rate of Return Minus Risk Free Rate of Return)/(Annual Standard Deviation) Treynor Ratio: : (Average Rate of Return Minus Risk Free Rate of Return)/(Degree of systematic Risk-ÃÆ'Ã… ½Ãƒâ€šÃ‚ ²) Reward to Assets Under Management Evaluating all of the above measures as a manager increases assets under management The average rate of return since the manager first had 50% of their current assets under management. 5.0 Qualitative Analysis of Stock as Input to Quantitative Analysis of Stock Subjective, non-statistical oriented analysis generally comes before Quantitative Analysis. Qualitative research is one of the two major approaches to research methodology in social sciences. Qualitative research involves an in-depth understanding of human behavior and the reasons that govern human behavior. Unlike quantitative research, qualitative research relies on reasons behind various aspects of behavior. Simply put, it investigates the why and how of decision making, as compared to what, where, and when of quantitative research. Hence, the need is for smaller but focused samples rather than large random samples, which qualitative research categorizes data into patterns as the primary basis for organizing and reporting results. Unlike quantitative research, which relies exclusively on the analysis of numerical or quantifiable data, data for qualitative research comes in many mediums, including text, sound, still images, and moving images. This sort of analysis is the most im portant for the following reasons: Stock market is in transition from poor form of efficient market to semi-strong form of efficient market; Most of the investors have inadequate knowledge of stock market; Most of the investors take investment decision on the basis of information being aired over the sky of the stock market without judgement; Most of the investors are willing to make capital gain; Most of the investors, especially small investors are vulnerable to stock market gambling/crisis originated from any source. Non-statistical Qualitative analysis generally explores the following: Sustainable competitive advantage Quality Experience of Management Employee Morale Loyalty Industry Competitors Strength of Research Development Cyclicality of the Industry Actions towards Investors interests Ability to achieve economies of scale General labor relations Quality and Positioning of Products Quality and Positioning of Services 6.0 Quantitative Analysis-Selection of Security to Buy or Sell An investor or Fund Manager can create An Equity Desk- a set of some stocks which has the potential to grow at a good pace over a period of time. This analysis is an attempt to rank the selected stocks and help an investor decide which among the lot is the best and the worst stock to invest at the current market prices. Basically, this is a quantitative analysis of a set of stocks, based purely on their fundamentals. The TED methodology can be used on any portfolio to determine the best and the worst. The study has taken 11 blue chip stocks for analysis as follows: All the 11 stocks will be analyzed based on P/E Ratio Return on Equity Last 4 years CAGR Sales Growth Last 4 Years CAGR Profit Growth Market Cap P/BV Ratio Debt to Equity Ratio Dividend Yield Last 4 Years CAGR dividend per share growth Dividend Payout Ratio Basically, we will be looking at parameters typically used by both growth and value investors. Ranking Methodology: All the 11 stocks are ranked based on each parameter say P/E Ratio to begin with. A stock with the lowest P/E Ratio gets the highest 11 points, while a stock with the highest P/E Ratio gets the lowest 1 point. Similarly, for other parameters like ROE, market-cap etc, each stock is awarded between 1 point and 11 points depending on where it stands compared to each other. The scores are added at the end, and the stocks are ranked from 1 to 11. Flaw in the Methodology: Looks into the past rather than the future to rank the stocks. ROUND NUMBER 1 THE P/E RATIO Obviously, lower the P/E ratio, the better. Since there are 11 stocks in the portfolio, the stock with the lowest P/E Ratio gets 11 points while the stock with the highest P/E ratio gets 1 point. Company Name P/E Ratio Points Earned 1. AX 11.67 11 2. BX 13.57 10 3. CX 19.29 9 4. DX 19.94 8 5. EX 20.46 7 6. FX 28.94 6 7. GX 29.56 5 8. HX 30.41 4 9. IX 40.23 3 10. JX 43.12 2 11. KX 55.12 1 AX is the cheapest stock of the lot and hence gets rewarded with the maximum 11 points. Meanwhile, KX had a loss making quarter recently, and hence its P/E is extremely high. It is appropriately penalized with just 1 point awarded to it in this round. The rest of the stocks get 10, 9, 8 etc points in descending order based on their current P/E. ROUND NO. 2 RETURN ON EQUITY Higher the ROE, better is the stock for investment. The stock with the highest ROE gets 11 points and the stock with the lowest ROE gets 1 point in this round. Company Name ROE Points Earned 1. BX 94.68 11 2. IX 45.00 10 3. DX 43.01 9 4. FX 39.99 8 5. AX 34.58 7 6. JX 34.55 6 7. CX 24.88 5 8. GX 18.59 4 9. EX 15.46 3 10. HX 13.71 2 11. KX 13.36 1 To find out the stock with the best combination of low P/E and high ROE, we add the points earned by each stock in the P/E round and the ROE round. Company Name P/E Ratio ROE Total Points Earned Ranking 1. BX 10 11 21 I 2. IX 3 10 13 VI 3. DX 8 9 17 III 4. FX 6 8 14 IV 5. AX 11 7 18 II 6. JX 2 6 8 IX 7. CX 9 5 14 V 8. GX 5 4 9 VIII 9. E X 7 3 10 VII 10. HX 4 2 6 X 11. KX 1 1 2 XI For now, the best stock to buy is BX and the worst to own now is KX. But the contest is not over yet. We add the scores earned by each stock in market cap, sales growth, profit growth, debt equity ratio and other rounds. ROUND NO. 3 THE MARKET CAP It is almost always better from capital appreciation point of view to invest in stocks with low market cap. So, in this round, the lowest market cap stock gets the maximum while the stock with the highest market cap to get just 1 point. Expect the GX twins to be hit hard in this round. Company Name Market Cap (TK.in Million) Points Earned 1. BX 513 11 2. CX 914 10 3. FX 1249 9 4. IX 2015 8 5. DX 3960 7 6. AX 6850 6 7. KX 8870 5 8. EX 10000 4 9. JX 12500 3 10. GX 30,000 2 11. HX 60,000 1 ROUND NO. 4 LAST 4 YEAR SALES CAGR Sales growth rates are as important as profit growth rates, if not more. If a stock has a scorching bottom line growth and a dull top line growth, it probably implies that the going might not last long. Bottom line growing faster than top line can happen because of improving margins, for example. But there is only a limit up to which you can increase margins after that, the bottom line growth will align with the top line growth. So in this round, we reward companies with high top line growth and take away points from companies with lower sales growth rates. Company Name 4 year Sales CAGR in % Points Earned 1. EX 87.91 11 2. IX 72.88 10 3. HX 37.88 9 4. FX 35.92 8 5. JX 33.36 7 6. GX 27.69 6 7. AX 24.37 5 8. DX 21.92 4 9. KX 21.00 3 10. BX 18.60 2 11. CX 15.88 1 ROUND NO. 5 LAST 4 YEARS PROFIT CAGR Company Name 4 year Profit CAGR in % Points Earned 1. IX 96.8 11 2. BX 73.21 10 3. EX 71.61 9 4. AX 48.89 8 5. DX 44.8 7 6. CX 38.95 6 7. HX 35.68 5 8. JX 35.57 4 9. FX 31.89 3 10. GX 22.45 2 11. KX 3.47 1 Now we add the scores again after 5 Rounds -Combination of Best Five Quantitative Parameters Company Name P/E Ratio ROE Market Cap 4 year Sales CAGR in % 4 year Profit CAGR in % Total Points Earned Ranking 1. BX 10 11 11 2 10 44 I 2. IX 3 10 8 10 11 42 II 3. DX 8 9 7 4 7 35 IV 4. FX 6 8 9 8 3 34 V 5. AX 11 7 6 5 8 37 III 6. JX 2 6 3 7 4 22 IX 7. CX 9 5 10 1 6 31 VII 8. GX 5 4 2 6 2 19 X 9. EX 7 3 4 11 9 34 V 10. HX 4 2 1 9 5 21 VIII 11. KX 1 1 5 3 1 11 XI ANALYSIS: BX tops each of the 5 rounds except for the rather crucial sales growth round. Although IX looks expensive, it still seems to be among the best stock to buy if we consider the above 5 parameters. KX had an extraordinary expense (write off) in the last period of study. This methodology punishes such a company, because at the end of the day, the market looks at the numbers on the table. Only the perfect companies are rewarded with higher rankings. The contest isnt over yet 5 more rounds to go, before we decide on the winners and the losers.

Hamlets Capacity For Self-Sacrifice Essay - 1716 Words

Topic: Discuss the ideas developed by the text creator about the individual’s capacity for self-sacrifice in the face of compelling circumstances. One single moment or event during the course of an individual’s life can effectively alter their priorities and transform their identity drastically. In The play Hamlet, by William Shakespeare, Shakespeare introduces the readers to the protagonist Hamlet who is draped in anger and emotions and has a new-found mission in life. Initially, Hamlet is portrayed as an individual in mourning over his fathers death and his mothers haste in remarrying to her brother-in-law and Hamlets uncle, Claudius. However, Hamlet’s character and personality were drastically altered after meeting the Ghost and†¦show more content†¦He therefore had to act mad even when talking to her because he realized his every move was being watched. This is evident when he told her he is not in love with her and that he never loved her. These statements by Hamlet caused him to inadvertently hurt Ophelia to such a great extent that she committed suicide. As a result, Hamlet was forced to permanent ly sacrifice his true love out of concern for his own safety and his goal. Hamlet’s determination and addiction for revenge is confirmed when he is willing to sacrifice his entrance to heaven by separating from his values and beliefs. Initially, Hamlet wishes â€Å"that this too too sullied flesh would melt, thaw, and resolve itself into a dew!† He is contemplating suicide as a result of his father’s death and his mother’s haste in remarrying to his father’s brother, Claudius. However, Hamlet brushes off this idea as an option by saying, â€Å"Or that the Everlasting had not fixed his canon ‘gainst self-slaughter! Oh, God, God† This portrays the religious beliefs of Hamlet at the time. He wishes suicide was not a sin. However, since it is, he cannot commit it. 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Why, they asked, wasnt Jim realistic, why didnt he forget the whole business and go his way and enjoy life? .... One wonders how many

The Manager as a Critical Thinker Free Essays

The 10 steps of critical thinking Include: What are the issue and conclusion, what are the reasons, what words or phrases are ambiguous, what are the value and descriptive assumptions, are there any fallacies in the reasoning, how good is the evidence, are there any rival causes, are the statistics deceptive, what significant information has been omitted, what reasonable conclusions are possible. The book stated that â€Å"an Issue Is a question or controversy responsible for the conversation or discussion. It Is the stimulus for what is being said† (Browne Kelley, 2012). We will write a custom essay sample on The Manager as a Critical Thinker or any similar topic only for you Order Now The book goes on to dividing the issue into two categories: descriptive and prescriptive. The book defines descriptive issues as those that cause people to question the accuracy of vents In the past, present or future. And prescriptive Issues are those that raise questions about what is the right thing versus the wrong thing to do, good versus bad, what we should do. The issue in this scenario falls under the descriptive category. The CEO of PAS Manufacturing, Raymond Sesame’s compensation is significantly higher compared to the salary of Coos in other companies with similar characteristics. James was hired In 2003 for a five year appointment with the starting salary at $400,000. During the first three years, the contract promised him raises of %, 5% and 7% consecutively. After the first three years, the Coo’s compensation continued to increase significantly while the company experienced zero growth In the year of 2006 and continued to experience loss ever since without signs of recovery. The impact of Sesame’s high compensation made headlines in a local newspaper. Employees of PAS are also expressing discontent with their current CEO. As a conclusion, the senior vice president of Human Resources at PAS wrote a memo to the Board of Directors advising the board that the compensation for the current CEO s misaligned with the industry average. He is hoping that the Board would consider searching for a new candidate to replace James who would be able to contribute to the company’s growth. There are several reasons provided by the Director of HRS to support his recommendation In replacing the current CEO with a new candidate. Browne and Kelley define reason as explanations or rationales that support the validity of a conclusion (2012, P. 30). In this case, the first reason is evidently provided in the table that compares the Coo’s salary to the company’s growth rate from 2003 o 2009. The Coo’s raise percentage continued to rise by 2 percent every year while the company’s growth seized In year 2006 and exhibit a loss trend In subsequent years. The HRS Director believes that compensation should be based on performance, 1 OFF reflect his performance. Another reason is that other Coo’s from companies with the same characteristics as PAS were only averaging about $391 ,659 in 2007 while Sesame’s salary was as much as $100,000 over the national average. It indicates that the company is spending â€Å"unnecessary’ money. Lastly, the number of dissatisfaction or the current CEO is growing among the employees of PAS. The HRS Director fears that if union workers have lost respect for the CEO, it would be hard to stop other groups from losing faith as well. The next step is identifying the words or phrases that seem ambiguous in this situation. The book stated that ambiguous words or phrases should be looked in the reasons or conclusion areas because the author wants the reader to accept a conclusion. Therefore, I should look for words or phrases that affect my decision (P. 41). In the last sentence, the HRS Director said that e hopes the successor â€Å"will be more hard-working and willing to do what is necessary’ which all sound very ambiguous. Because he never mentioned previously what constitutes as hard-working. Hard-working could mean different things to different people. And â€Å"willing to do what is necessary’, what does that mean exactly? There seems to be implied meanings to this phrase. A person might think doing whatever necessary as breaking the laws to achieve the goal while others might have an entirely different interpretation. Another ambiguous word is â€Å"greatness† in the same sentence. Greatness could also mean many things in this case. It could mean that the company is able to recover its losses or the company is able to regain the trust from partners and employees. Once again, it is hard to determine exactly what the Director want to express by using these words and phrases. The next stage of critical thinking is identifying the value and descriptive assumptions. According to the text, â€Å"a value assumption is an implicit preference for one value over another in a particular context† while â€Å"a descriptive assumption is an unstated belief about how the world was, is or will become† (P. ). The HRS Director considers pay for performance as the best method to determine compensation. By supporting this idea, he believes that productivity is the determining factor in evaluating how good a worker is. Therefore, he prefers his company to follow the industry best practices in determining the Coo’s pay rather than the current practice. The descr iptive assumption in this case is the belief that the company’s performance will improve under the direction and management of a new CEO. In other words, the company’s status cannot be improved by other means except for the replacement of the CEO. There are several fallacies that the author used to persuade the reader’s opinion in this situation. The author attacked the Coo’s personality by pointing out that a local newspaper recently quoted the CEO saying the following line; â€Å"I’m worth every penny I’m paid; this town owes everything to me and my family’. This is an attempt to show that the CEO has disputable character and that he is a cocky ungrateful man. The author also went on to say that the CEO is a very wealthy man as the only grandson of the company’s founder. And because of his financial status, he has no inventive to ark hard for this company to strive. Another fallacy that was used is the slippery slope technique in which the author assumes that one event will set off a chain of uncontrollable and undesirable outcomes. The author said that once union workers lose respect for the CEO by circulating an unflattering comic representation it will losing faith in the CEO as well. Next step in critical thinking is to determine the validity of the evidence presented. The first evidence provided by the author is the table listing the Coo’s annual raise versus the company’s annual growth rate from he company’s Human Resources Department. This evidence could be considered as valid because these are probably based on exact figures provided on payroll as well as the company’s financial statements. The next evidence that the author presents is the average salary for other CEO in the same industry. At first glance, by using the phrase â€Å"according to the Economic Research Institute†, it would cause the reader to think that this must be a reliable source. But when looking at the footnote at the bottom of the page, the source was Just a salary calculator providing estimates. There re no concrete facts to support that the figure presented was the actual average for the industry. That makes the source not very reliable on its accuracy. The author went on to say that research shows that Coo’s median total compensation fell yet the source for this research is from wick. Wick is not considered as a scholarly source for research. The next evidence provided is the survey of executive pay practices. The author stated that 64% from that survey reported salary freeze yet the author never stated how large the sample size was and failed to mention if the sample was Mandalay selected or not. Surveys are often biased because it fail to truly represent how people truly feel instead people fill out answers as they think they have to give. Lastly, the author quoted another cite citing other cities. The author used a source that was quoted in the Baltimore Sun without examining to see if the original source is dependable or not. Lastly, the statement that â€Å"everyone in the Human Resources field knows† is a generalization. The book defines this as â€Å"a person draws a conclusion about a large group based on experience with only a few members of the group. The author clearly has not met with everyone in the HRS field, therefore, he use his experience as being the HRS director to support his claim that this is the thinking of the whole field. The next step in critical thinking in the book is looking for rival causes. The books definition of â€Å"a rival cause is a plausible alternative explanation that can explain why a certain outcome occurred† (P. 128). The author was citing several sources to support his claim that the median compensation for CEO in the industry fell during Sesame’s terms, as well as a lot of companies were freezing or rimming salaries for their executives. The author also cited another claim from a source stating that indeed, excessive CEO compensation was the actual cost of the economic recession in the United States during those years. This is the cause that the writer wants the readers to believe that the growth of PAS has stalled over the years is due to excessive compensation. There could be many other reasons that could arguably be the reason why the United States was experiencing a recession during that period such as high unemployment rate, foreign policy, war spending, amount of unsecured loans, etc. Clearly, high CEO compensation cannot be considered as the sole cause of the recession as the author wants us to believe. The author in this scenario used several statistics in trying to support his claim. First he said that the medial total compensation fell by 7. 5 percent, in this case, we weren’t provided with the base number to determine if 7. 5 percent was significant or not. Once again, the author claimed that 64 percent of companies responding to the survey reported that omitted the total number of companies. 64 percent is an impressive number and we old have been easily swayed if we didn’t question the use of statistics. How to cite The Manager as a Critical Thinker, Papers