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IT in IT in Financial Markets IT in Financial Markets IT in Financial Markets. E-investors. Ali Javed Adrienne Fernandez Ekaterina Ianovskaia. Agenda. Top-down approach to security analysis First portfolio vs. last portfolio Tools used Surprise 1 Surprise 2 Neural Networks - PowerPoint PPT Presentation



IT in IT in Financial MarketsIT in Financial MarketsIT in Financial MarketsE-investorsAli Javed Adrienne Fernandez Ekaterina Ianovskaia

AgendaTop-down approach to security analysisFirst portfolio vs. last portfolioTools usedSurprise 1Surprise 2Neural NetworksChallenges and risk mitigationLessons learned

E-INVESTORSIntroductionModern Portfolio Theory

Dont put all your eggs in the same basket!

use of diversification strategy

diversify across industries and companies

choose large market capitalization stocks

Avoid risks

E-INVESTORSStrategy:Top-down approach to security analysisE-INVESTORSStep 1: Economic Analysis

Research and data mining:OnlineOfflineTVNewspapersdiscussions with professorsPopularity hypothesis by Keynes: Find what stocks will be popular among other investorsCommunity based social investing websites like Zecco Findings: High economic instabilityDont invest in Japan U.S. low dollar stimulates exports and economic growth

E-INVESTORSStep 2: Industry Analysis

Historical trends show that the most performing current industries are:Information TechnologyFinancialsEnergyIndustrialsHealth careConsumer Services

Fidelity.comE-INVESTORSFirst PortfolioE-INVESTORSStep 3: Fundamental Analysis Teamwork: Search different websites, use Google docs to post findingsTechnical analysis: look at stock patterns and analyzing the potential of growth of these stocks.Choose many stocks performing better than the benchmark S&P500 over the pastTo diversify some of the risk, choose several stocks with more steady returns, which are far less volatileHigh earnings per shareMixed high and low betas

E-INVESTORSStock Sector and IndustryTarget Investment Amount QuantityWeights1CBS Consumer Services: Media Conglomerates294,642.86 12,100 7%2SIX Six FlagsConsumer services: movies/entertainment294,642.86 4,718 7%3HMIN Home Inns & Hotels Management Inc, ADRConsumer services: Hotels/Resorts/Cruiselines, ADR200000 5,322 4%4AAPLElectronic tech computer processing hardware339285.7143 944 8%5LMT Lockheed MartinElectronic tech: aerospace and defence339285.7143 4,200 8%6RIMM Electronic tech: telecom eqiupment339285.7143 4,957 8%7CVX ChevronEnergy Minerals: integrated oil517,857.14 4,970 12%8ALRN American Learning CorpFinance: insurance, brokers, services18,073.76 6,364 0%9AXP American ExpressFinancial conglomerates: Finance428,571.43 9,674 10%10GS Goldman Sachs Group IncFinance: Investment Banks/Brokers410,497.67 2,496 9%11JAZZ PharmaceuticalsHealth technology: pharmaceuticals196,428.57 7,480 4%12PFE PfizerHealth technology: pharmaceuticals196,428.57 9,936 4%13NVS NovartisHealth technology: pharmaceuticals196,428.57 3,436 4%14EP El Paso corpIndustrial services: oil and gaz214,285.71 11,710 5%153MProducer Manufacturing : Industrial conglomerates214,285.71 2,309 5%16TTM TATA Motors Producer manufacturing: Machinery, ADR250,000.00 9,571 6%17ALU Alcatel Lucent SATelecom equipment, Electronic technology, ADR50,000.00 11,442 1%First PortfolioE-INVESTORSLast Portfolio

E-INVESTORSPortfolio management over time

E-INVESTORSTools used CompuStat CRSPData mining, stock chartsCAPM Matlab

Most useful tool: Excel solver

E-INVESTORSStep 1: Define what we need to find: maximum return minimum variance

Step 2: Prepare the SpreadsheetData and Constraints

Step 3: Solve the model with the SolverFind optimal portfolio

Excel Solver: Step by step

E-INVESTORSBest Portfolio: diversifiedCovariance matrix

E-INVESTORSExcel Solver: Step by stepE-INVESTORSSurprise 1-Mad MoneyFollowed recommendationsChose stocks according to our analysis

Diversification:According to days of recommendation

Outcome: positive!

E-INVESTORS16Surprise 1-Mad MoneyOutcome

SKS : Monthly

SKS : Daily

ORCL : DailyORCL : MonthlyMCD : MonthlyMCD : DailyE-INVESTORS17Surprise 1-Mad MoneyOutcome

E-INVESTORS18Surprise 2 - Vice vs VirtueVirtue Companies:AGP (Amerigroup Corp)WBS (Webster Financial Corp)PLL (Pall Corp)Vice Companies:WMT (Wal-Mart Stores Inc)NOC (Northrop Grumman Corp)KBR (KBR Inc)

E-INVESTORSSurprise 2 - Vice vs VirtueOutcome

AGP: -$4,395.47

WBS: +$487.20

PLL: +$2,844.60

WMT: +$2,740.75NOC: -$1,143.84

KBR: -$1,255.68


Defense contractor

20 Vice: Virtue: WMT: 2,740.75NOC: -1,143.84KBR: -1,255.68341.23AGP:-4,395.47WBS: 487.2PLL: 2,844.60-1,063.67Surprise 2 - Vice vs VirtueOutcome

E-INVESTORSNeural Networks

Trial version : Limited number of inputs

E-INVESTORSNeural Networks in stock price forecastData: 250 observations (1 year period) of WBS daily stock prices and market indicators from Compustat


Fundamental: Returns, Volume

Technical: Moving averages (30) (90)

Market Index: S&P 500

WBSE-INVESTORSNeural Networks Result

50-50-50 ruleWBSE-INVESTORSNeural Networks ResultPerformancePRCMSE1.961558161NMSE2.969163734MAE1.274166299Min Abs Error0.144731369Max Abs Error2.386955525r-0.048827027Predicted Volatility well, but not magnitude of changes and price levelWBSE-INVESTORSNeural Networks ResultAGPBest NetworksTrainingCross ValidationEpoch #501Minimum MSE0.0305597980.442329399Final MSE0.0305597980.69339859E-INVESTORSNeural Networks ResultPredicted Price Level better, not Volatility.AGPPerformancePRCMSE68.69420555NMSE39.35646708MAE8.182435557Min Abs Error5.198936887Max Abs Error10.70313759r0.052262509Reason: Input FactorsE-INVESTORSNeural Networks ResultNot all factors that affect one stock affect the other

Bank Prime Loan Rate

Sensitivity To The Market

E-INVESTORSEvent Analysis We did Event Analysis using EventusWalmart dividend increase announcement for April 1st Assuming markets are efficient or semi-efficientTraders can react to news faster than we can.Was not useful in picking stocks

E-INVESTORS29Challenges and risk mitigationDifficulty to use some portfolio analysis tools (Matlab)Difficulty to understand tools (Neuro Solutions)Selling Stocks (Glitches, time limit)Availability issues for our team (Google)


E-INVESTORSLessons learned

New stock portfolio investment toolsNever use one tool in isolationMarket is quicker than we areInstinct Vs HopeTiming is KeyMarket Efficiency? Eventus Vs Mad MoneyDetailed Analysis = Computer Power

E-INVESTORSTo maximize our success and efficiency, we have evenly distributed the research and each of us was responsible for searching specific online financial sources suggested in class. In order to enhance our collaboration, we shared our findings on a special Google document that we created for our project, and this approach really facilitated our work. In such a way, we individually searched the sources and then could see if we had chosen the same companies for our portfolio. Afterwards, during our meeting, we were able to come to an agreement for the most promising companies in which to invest our stocks and the weights for each investment. 32Last Portfolio

E-INVESTORSThank you !



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