Session 3 Flashcards
Converge
hamgara budan, hamgara shodan
convoys from America and the UK traversed thousands of miles to converge in the Atlantic.
after a large number of tries the mean should converge to expected value.
Normal confidence intervals
90% = Xbar +- 1.65s 95% = 1.96 99% = 2.58
zariba hamine bara miu va sigma ham farghi nadare
Continuous rate of return
HPR(T) = e^Rcc.T - 1 HPR = effective yield
Bond indexing
Designing a portfolio comprised of fixed income securities so that the portfolio follows a particular bond index benchmark.
Municipal bond
A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued. Also known as a “muni.”
Coupon rate
A bond’s coupon rate can be calculated by dividing the sum of the security’s annual coupon payments and dividing them by the bond’s par value.
Anomaly
/əˈnäməlē/
khalafe ghaede
there are a number of anomalies in the present system.
Value stock vs growth stock
growth stock mutual fund managers look for stocks of companies that they believe offer strong earnings growth potential, while value fund managers look for stocks that appear undervalued by the marketplace. Some fund managers combine the two approaches.
Look ahead bias
Bias created by the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This will usually lead to inaccurate results in the study or simulation.
Sentiment
- nazar
a view of or attitude toward a situation or event; an opinion.
I agree with your sentiments regarding the road bridge
synonyms: view, - ehsas
a feeling or emotion.
an intense sentiment of horror
Intrinsic
zaati
access to the arts is intrinsic to a high quality of life
synonyms: inherent, innate
Commodity
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services.
Contrarian
/kənˈtre(ə)rēən/
a person who opposes or rejects popular opinion, especially in stock exchange dealing.
Since then, bear market losses and dashed hopes have taught them to be more skeptical - which to bullish contrarians just makes this rally all the more credible.
Margin
- Borrowed money that is used to purchase securities. This practice is referred to as “buying on margin”.
Buying with borrowed money can be extremely risky because both gains and losses are amplified. That is, while the potential for greater profit exists, this comes at a hefty price - the potential for greater losses. Margin also subjects the investor to a number of unique risks such as interest payments for use of the borrowed money. - The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
For example, if you hold futures contracts in a margin account, you have to maintain a certain amount of margin depending on how the market value of the contracts change.
Margin account
A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralized by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.
In a margin account, you are investing with your broker’s money. By using leverage in such a way, you magnify both gains and losses.
Margin debt
The dollar value of securities purchased on margin within an account. Margin debt carries an interest rate, and the amount of margin debt will change daily as the value of the underlying securities changes.
Momentum
In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month.
Short interest
number of shares investors have borrowed and sold short.
Advancing issues
The number of securities that have increased in price during a specified period of time, typically one day or one week.
opposite of declining issues.
Simple random sampling
selecting a sample in such a way that each item in the population being studied has the same likelihood of being chosen.
Systematic sampling
selecting every nth member from a population.
a way to form an approximately random sample.
Sampling error
the difference between a sample statistic (mean, variance, …) and it’s corresponding population parameter.
Sampling distribution
sampling distribution of the sample statistic is a probability distribution of all possible sample statistics computed from a set of equal size samples that were randomly drawn from the same population.
Stratified random sampling
dividing the population into subgroups and then taking random samples from each subgroup.
is used in bond indexing because of the difficulty and cost of completely replicating the population of bonds.
Longitudinal data
observations over time of multiple characteristics of the same entity.
Panel data
observations over time of the same characteristic for multiple entities.
Desired properties of an estimator
- unbiased: expected value of the estimator be equal to the parameter
- efficient: an unbiased estimator is also efficient if the variance of it’s sampling distribution is smaller than all the other unbiased estimators.
- consistent: the accuracy of the parameter estimate increases as the sample size increases.
Sample biases
- data mining bias: statistical significance of the pattern is over estimated because it was found through data mining.
- sample selection bias: some data is systematically excluded from the analysis usually because of the lack of availability.
- survivorship bias: only including survivors
- look ahead bias: Bias created by the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This will usually lead to inaccurate results in the study or simulation.
- time period bias: time period over which the data is gathered is too short (specific to that period) or too long (economic relationships might have changed during)
*these biases will result in central limit theory not applying and as a consequence, wrong confidence intervals.
Line chart
show closing prices for each period as a continuous line.
Bar chart
each period is displayed as a vertical line from the lowest price of the day to the highest. closing price is also indicated as a point or dash on the right side of the line, if the chart includes opening prices, these are shown on the left side of each vertical line.
Candlestick charts
each period is displayed as a box from the opening price of the day to the closing. if opening price is higher than closing price the box is filled, otherwise clear.
*make patterns easier to recognize.
Point and figure charts
A chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that either consist of a series of stacked X’s or O’s. A column of X’s is used to illustrate a rising price, while O’s represent a falling price. this type of chart is used to filter out non-significant price movements by using reversal amount (usually 3 box) to go to the next column.
Rate of change oscillator (ROC)
100*(latest closing price - closing price n periods earlier)
oscillates around zero.
buy when the oscillator changes from negative to positive during an uptrend in prices, and sell when the ROC changes from positive to negative during a downtrend in prices.
Relativ strengths index (RSI)
ratio of total price increases to total price decreases over a selected number of periods, and then scaled to oscillate between 0 and 100.
over than 70 –> overbought market
less than 30 –> oversold market
Moving average convergence/divergence (MACD)
MACD line is the difference between two exponentially smoothed (greater weight on more recent observations) moving averages of the price (different Ns)
signal line is an exponentially smoothed moving average of the MACD line.
both lines oscillate around zero but have no bounds.
*MACD line cutting above the smoother signal line is a buy signal and the MACD line crossing below the signal line is viewed as a sell signal.
Technical analysis tools
- charts: line, bar, candlestick, point and figure, volume
- patterns: 1)reversal: head and shoulders, inverse H&S, double/triple top or bottom– 2) continuation: triangles, rectangles, pennants, flags
- indicators: 1)price based: moving averages, bollinger bands, momentum oscillators– 2)sentiment (non price based): opinion polls, put/call ratio, VIX, margin debt, short interest ratio– 3)flow of funds (non price based): TRIN, margin debt, mutual fund cash position, new equity issuance, secondary offerings.
Stochastic oscillator
two lines: K% line is the difference between the latest price and the recent low (like in recent 14 day) as a percentage of the difference between the recent high and low.
the D% line is a 3 period average of the K% line.
Points where the K% line crosses the D% line can also be used as trading signals in the same way as the MACD lines.
Put/call ratio
increase in put/call ratio (price) indicates a more negative outlook for the price of the asset (market sentiment).
- extremely high ratios–> strongly bearish investor sentiment and possibly an oversold market.
- extremely low ratios–> vice versa
Volatility index (VIX)
a measure of volatility of options on S&P500
- high levels of VIX suggest investors fear declines in the stock market.
- is often interpreted in a contrarian way, viewing a predominantly bearish investor outlook as a bullish sign.
Margin debt
Increasing margin debt tends to coincide with increasing market prices and decreasing margin debt tends to coincide with decreasing prices.
*is also a flow of funds indicator, increasing margin debt may indicate that investors want to buy more stocks. decreasing margin debt indicates increased selling
Short interest ratio
short interest decided by average daily trading volume.
high–> investors expect the stock price to decrease + high future buying demand!
Short term trading index (TRIN)
=arms index
measure of funds flowing into advancing and declining stocks:
TRIN = (# advancing issues/# declining issues)
(volume of advancing issues/
volume of declining issues)
*close to 1: funds are flowing evenly
*>1: majority of volume in declining stocks
* large daily losses in the market
spikes downward–> large daily gains in the market
Mutual fund cash position
ratio of mutual funds’ cash to total assets.
low in uptrends and vice versa.
usually used as a contrarian measure, when mutual funds accumulate cash, this represents future buying power in the market, so a high ratio suggests future price increases.
New equity issuance and secondary offerings
issuers tend to sell new shares when prices are thought to be high, increases in issuance of new shares may often coincide with market peaks.
Elliot wave theory
is based on a belief that financial market prices can be described by an interconnected set of cycles. the cycle periods range from a few minutes to centuries.
*in an uptrend, upward moves in prices consist of five waves and downward moves occur in three waves. it’s the opposite in a downtrend. each of these waves is opposed of smaller waves of the same general form.
Fibonacci ratios in wave theory
Eliot wave theorists believe that the ratios of fibonacci numbers are useful for estimating price targets. foe example a down leg can be 1/3 or 2/3 the size of an up leg, or a price target can be 13/8 of the previous high.
*ratios of consecutive fibonacci numbers converge to 0.618 and 1.618 as the numbers in the sequence get larger. these two values are commonly used to project price targets.
0, 1, 1, 2, 3, 5, …
Intermarket analysis
refers to analysis of the interrelationship among the market values of major asset class, such as stocks, bonds, commodities, and currencies. relative strength ratios (RSI) are a useful tool for determining which asset classes are outperforming others. after identifying attractive asset classes, an analyst can apply the same method to identify which assets within these classes are outperforming others.
Moving average lines
mean of the last n closing prices.
- used to smooth the fluctuations, the larger the n, the smoother.
- analysts usually choose moving average periods that make intuitive sense, like 20, representing trading days in a month.
- in uptrend price is above the moving average and in a downtrend it’s below
- moving average lines are often viewed as support or resistance levels.
Golden cross
when the short term average line (like 20), crosses above long term average line (like 250)
is often viewed as an indicator of an emerging uptrend or a buy signal
Dead cross
when the short term average line (like 20), crosses below long term average line (like 250)
is often viewed as an indicator of an emerging downtrend or a sell signal
Bollinger bands
two lines above and below the n period moving average. distance: a chosen number of standard deviations of closing prices over the last n periods (typically 2)
*bands move away from each other when price volatility increases and move closer together when prices are less volatile
Bollinger band signals
price at or above the upper bollinger band maybe viewed as indicating an overbought market (one that is too high and likely to decrease in the near term) and the opposite for prices at or below the lower bollinger band.
–> sell at upper band, buy at lower band (contrarian strategy)
Oscillators
- a group of tools used to identify overbought and oversold markets.
- based on market prices but scaled so that they oscillate around a given value like 0 or between two values like 0 and 100
- extremely high values of an oscillator indicate an overbought market and vice versa
Convergence/divergence of the oscillator and market prices
*oscillator charts can be used to identify convergence or divergence of the oscillator and the market prices. convergence occurs when when the oscillator shows the same pattern as prices (e.g., both reaching higher highs). and divergence occurs when the oscillator shows a different pattern than prices (e.g., failing to reach a higher high when the price does).
Convergence–> price trend is likely to continue
Divergence–> potential change in the price trend
Reversal patterns
occurs when a trend approaches a range of prices but fails to continue beyond that range.
- head and shoulders: suggests the demand that has been driving the uptrend is fading, especially if each of the highs occur in declining VOLUME.
- double/triple top: like H&S, trends faces a resistance level
all of these can be inverse
Head and shoulders price target
downtrend price target:
if the price declines beyond the neckline after the right shoulder forms, the downtrend is projected to continue equal to “head price - neckline price”
the size of a double/triple top can also be used.
Continuation patterns
suggest a pause in a trend rather than a reversal.
- triangles: form when prices reach lower highs and higher lows. trendlines on the highs and the lows converge when they are projected forward. can be symmetrical (higher low, lower high), ascending (higher low, resistance level) or descending (lower high, support level)– triangles suggest buying and selling pressure have become roughly equal temporarily.
- rectangles: trading temporarily forms a range between a support level and a resistance level.
- flags and pennants: rectangles and triangles that appear on short term price charts.
Triangle price target
the size of a triangle, or the difference between the two trendlines at the time when the pattern begins to form, can be used to set a price target. assuming the price breaks out of the triangle and the previous trend continuous.
rectangles can also be used.
Uptrend
prices are consistently reaching higher highs and retracting to higher lows
Downtrend
prices are consistently declining to lower lows and retracting to power highs.
Trendline
in uptrend: connects the increasing lows in price.
in downtrend: connects the decreasing highs in price
Breakout
price crosses the downtrend trendline and goes above it– may signal the end of the previous trend
*important because trendily is considered a support/resistance level
Breakdown
price crosses the uptrend trendline and goes below it– may signal the end of the previous trend
Support and resistance levels
at support level buying is expected to emerge that prevents further price decrease, the opposite in resistance level.
*support and resistance levels frequently appear at psychologically important prices like round numbers or historical highs and lows.
Change in polarity
refers to the belief that breached resistance levels become support levels and breached support levels become resistance levels.
Technical analysis assumptions
- study of collective market sentiment, as expressed in buying and selling of assets.
- it is based on the idea that prices are determined by the interaction of supply and demand
- price and volume reflect the collective behavior of buyers and sellers
- market prices reflect both rational and irrational investor behaviour. (against efficient market hypothesis)
- not concerned with identifying buyers’ and sellers’ reasons for trading, but only with the trades that have occurred.
Technical analysis advantages
- use observable data (doesn’t mean it’s objective)
* fundamental analysis is subject to assumptions and restatements, and might not be available at all foe assets such as currencies or commodities. - it can be applied to the prices of assets that do not produce future cash flows (like commodities)
- can be useful when financial fraud occurs, price and volume may reflect the true value of the company even before the fraud is widely known and before the financial statements are restated.
Technical analysis limitation
the usefulness of this method is limited in the markets where price and volume data might not truly reflect supply and demand. this may be the case in illiquid markets and in markets that are subject to outside manipulation (like central banks in currency market). also for stock of bankrupt currencies short covering can create positive technical patterns even when it is known that the stock price will go to zero.
