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What is absolute frequency?

In statistics, the number of times that a specific value shows up in a data set is the absolute frequency of that value. The absolute frequency can then be used to find the relative frequency, which is the probability that the specific value is observed in a given number of trials. The relative frequency (empirical probability) takes the absolute frequency and divides it by the total number of trials (cumulative frequency), and can be expressed as a ratio or percentage. Continue reading...

What is R-Squared?

R-squared is a statistical tool called a correlation coefficient. It is a percentage measurement that represents how closely correlated a security’s movement is with the movements of a benchmark index. Values range between 0 and 1 and are often expressed as percentages between 0% and 100%. A higher R-squared (between 85% and 100%) tells investors that a security moves more or less in correlation with the benchmark index. A lower R-squared (70% or less) means that the security in question moves independently from the index. Continue reading...

Is there any merit to some other portfolio theories?

Plenty of theories are known because they are useful, and it is up to you to discern which ones may be worth your time and fit your situation and investment or analysis style. There’s always merit to any theory which has been put through rigorous statistical tests. However, keep in mind that as with any other statistical inferences, an event with probability zero sometimes happens (Black Swans), and an event with probability one sometimes doesn’t. Continue reading...

What is the Best Performing Stock Ever?

Based purely on statistics, the “best” performing stock ever between 1957 and 2007 was Phillip Morris (cigarette maker). If you had invested $1,000 into the company in 1957, your investment would be worth a little under $6 million today. Of course, during those 50 years, you would have had to survive the sudden dips and jumps involved without making any rash decisions, something very few investors have the stomach for. Continue reading...

How large are market fluctuations?

Fluctuations are represented in terms of volatility, and different types of investments experience different levels of volatility. The answer here depends on which market you’re talking about. Generally speaking, the capital markets in fixed instruments, such as government bonds, are the least volatile. Market fluctuations of the price of commodities, small-cap stocks, and emerging markets are the largest, and can be as high as 30-40% per year. Continue reading...

What is backtesting?

Analytical financial theories and trading strategies can be “backtested” by applying them to historical data. Backtesting is to simulate what it would have been like to use a certain strategy or indicator in the past. Because markets are more complicated than a simple algorithm, such as an assumed future rate of return, it is preferable and somewhat more dramatic to use actual historical data for testing. There is an abundance of historical market data available to those who would like to use it for backtesting a theory, strategy, or indicator. Continue reading...

How is the Consumer Price Index (CPI) Calculated?

The Consumer Price Index (CPI) is calculated using prices of sample goods from predetermined urban areas. According to the Bureau of Labor Statistics (BLS), the CPI is a product of a series of interrelated samples. First, using data from the 1990 Census of Population, BLS selected the urban areas from which data on prices were collected and chose the housing units within each area that were eligible for use in the shelter component of the CPI. The Census of Population also provided data on the number of consumers represented by each area selected as a CPI price collection area. Continue reading...

How Do I Measure My Risk Tolerance?

Your risk tolerance should be a measure of how willing you are to absorb losses in your portfolio. Studies in behavioral science show that investors loathe losses about two and a half times more then they enjoy gains. Everyone can likely relate to this stat. But, to be a successful investor that achieves long-term equity like returns, one has accept some level of risk inherent in the stock market. Continue reading...

What is the Unemployment Rate?

There are a few ways to measure unemployment, but it is normally interpreted as a percentage of the working-age population that does not have a job. The statistics that are used to determine unemployment rate typically use the number of unemployed people who are actively searching for a job. The Bureau of Labor Statistics conducts a monthly poll called the Current Population Survey which goes out to about 50,000 households, and this is a significant source of unemployment data. Continue reading...

What are Some of the Biggest Bankruptcies in Recent History?

Before Lehman Brothers and Bear Sterns, probably the most well-known and publicized bankruptcy was the infamous Enron scandal. To summarize, Enron executives, fully aware that the company was insolvent, started to sell their stock, while convincing the general public that the stock would continue to rise and the company was prospering (despite actual horrendous losses). As the stock dropped lower and lower, the executives continued to lie to the public, and most people fell into the trap, convinced that the low stock prices were a great opportunity (the stock was going to rebound any day – or so they thought). Continue reading...

Who are Some of the More Well-Known Investment Managers?

There have been many notable investors who have withstood the test of time. Of those that are still living, Warren Buffett definitely stands out of the crowd. If you had invested $1,000 with him in 1965, the investment would be worth over $6 million today. Some of those who could be considered in the realm of "founding fathers" of sound investment strategy would include J.P. Morgan, Benjamin Graham (author of the famous "The Intelligent Investor"), and John Templeton. Continue reading...

Who is the Most Widely Known Villain of Wall Street?

Throughout the history of the U.S. Stock Market, there have been countless crooks, swindlers, and villains. Money can drive people to cheat, and there have been no shortage of cheaters over the years. Undoubtedly, the biggest hoax in the history of the market is credited to Bernard Madoff, who made off (no pun intended) with over $10 billion of his investors’ money through a massive Ponzi scheme. However, there have been countless other criminal activities, such as the Enron scandal of the early 2000’s. Continue reading...

What were the Biggest Single Day Market Moves?

Since the Dow Jones Industrial Average’s creation in 1896, there have been several crashes and several days of huge gains. The biggest moves can be defined in two ways: either by percentage change or by change in points. In terms of gains, the largest single-day point gain occurred on October 13, 2008, when the Dow rose 936 points (11%) – the sudden leap occurred during a time of wild upside and downside volatility, and was in response to unexpected positive global economic news. Continue reading...

What was the "Flash Crash"?

On May 6, 2010, investors around the world were shocked when the Dow Jones Industrial Average fell nearly 1,000 points in a matter of minutes. The market recovered just as quickly, finishing the day down a much lesser 348 points. The so-termed "flash crash" was caused by a trader's technical errors in entering order amounts, which caused a few stocks to post erroneous numbers (notably Procter & Gamble, which showed a 37% loss, before recovering to a 2% loss on the day). Continue reading...

How Many Dollars do We Have in Circulation?

According to the Federal Reserve, there are over 1.7 trillion U.S. Dollars in circulation. This number has been drastically increasing throughout the last few years, mostly due to programs such as Quantitative Easing. As of 2016, QE programs have ended and the Fed's balance sheet is shrinking, but M2 money supply still remains at elevated levels. What is the Size of our National Debt? What is Currency in Circulation? Continue reading...

What are some Key Numbers Related to the World Capital Markets?

As of 2014, global GDP was $77 trillion. The total market capitalization of all world stock markets is approximately $70 trillion, and about a fourth of that amount is the U.S. market. The U.S. economy is the largest by GDP, which for 'fiscal year' (FY) 2016 was approximately $19 trillion. The total value of notional derivatives fell to $18.1 trillion. How Many Dollars do We Have in Circulation? What is Currency in Circulation? Continue reading...

What was the Best Day for the Markets?

The best day for the markets, in terms of the largest single-day point gain for the Dow Jones Industrial Average, was October 13th, 2008. It happened when the Dow closed up 936 points in response to seemingly positive news about the handling of the ongoing financial crisis. The market would fall much further however before the next uptrend began, on March 9, 2009. In percentage terms, the biggest gain for the Dow came on March 15, 1933, when the index shot up over 15% (8.26 points) in response to Franklin D. Roosevelt's (FDR) Emergency Banking Act. Continue reading...

What was the Worst Day for the Markets?

The worst day for the markets, in terms of the largest single-day point loss by the Dow Jones Industrial Average, was September 29th, 2008. It happened when the Dow lost 777.68 points in response to the House’s rejection of the proposed bank bailout plan. On October 19th, 1987, however, the Dow dropped 22.61% (508 points) in response to a global domino effect of crashing markets. This is the largest single-day percentage drop to date. Continue reading...

What are realistic expectations for my portfolio performance?

Realistically, you should not plan on getting more than about 10% average per year over the long term for a portfolio of diversified equity exposure and you should really plan on getting less than that to be on the safe side. Everybody wants to have a portfolio that outperforms the market when the markets are rising and does not lose money when the markets are falling. We have a secret for you – it’s not possible. Continue reading...

What is market research?

Market research is the process of evaluating a possible opportunity for entering into a market with a new product or company, or for evaluating the effectiveness of a product or company in a market that they are already invested in. Market research can also be important for decisions regarding mergers and acquisitions. It may involve surveys and market study groups. Sometimes a company will conduct its own market research, but often third-party companies are hired for the task. These companies may specialize in sampling and surveying methods for consumer groups, and/or statistical analysis of a business model or product’s chance of success in a given market. Companies may look to such analysts if they are considering a merger or acquisition, or of launching a new product. Continue reading...