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Tag: covariance

In probability theory and statistics, covariance is a measure of how much two variables change together.

In finance, the beta (?) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole.
An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa.[2]
Correlations are evident between companies within the same industry, or even within the same asset class (such as equities), as was demonstrated in the Wall Street crash of 1929. This correlated risk, measured by Beta, creates almost all of the risk in a diversified portfolio.
The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset’s statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. (Wikipedia Jan 2010)

Post Modern Security Analysis

Fish schools, covariance, and DYOR

Security market observes have long noted that investors seem to jump hither and yon, like the synchronized swimming of schools of fish.

This phenomenon is given the mathematical term ‘covariance’ and a numerical measure called ‘beta’.

Covariance is a central concept in Modern Portfolio Theory, and also in Technical Analysis with the saying ‘the trend is your friend’.

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The Post Stock Buyback Era

Seeking investment opportunities

On a tightrope ... without a net.

The Crash of 2008 signaled a turning point in capital markets. The stock buyback era seemed to have ended. The Efficient Market Hypothesis was discredited. The inability of market experts and major institutions to place a fair value on thousands of securities indicated basic problems in security analysis and the handling of freely available information.

This article describes new challenges facing fundamental security analysts in the early 21st century, and the consequent opportunities.

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Stock buybacks and options

The yin-yang that rules the market

Yin and Yang

Stock buybacks and stock options are two dominant interlocked forces that have determined the direction of prices in the US equity market since 1982. Corporate management undertakes a stock-buyback program to manipulate the price of company stock upwards and benefits from this action by exercising executive stock options. Price increases caused by buybacks of one company reflect on the prices of stocks of other companies.

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Page 1 of 212

Featured articles on inside pages

Stock buybacks

Warren Buffett attacks buyback schemes

In the 2005 Berkshire-Hathaway annual report, Warren Buffet points to the unethical aspects of the buyback-option schemes so common in the US stock market. He noted that "Too often ... the deck is stacked against investors when it comes to the CEO’s pay. ... every dime paid out in dividends reduces the value of all outstanding options"
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The target of classical security analysis is 'intrinsic value', a fuzzy concept defined as the value justified by the facts. Now, there may be too many 'facts' while prices exceed 'intrinsic value'. More ...

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If we are to believe the old adage that, 'people vote their pocketbooks', why are so many of the Super-Rich ardent supporters of the Democratic Party? Why do the liberal Super-Rich seem to act in a way that is so contrary to their selfish interests and economic well-being? Here I show how capital flow analysis of the Federal Reserve flow of funds accounts provides an answer to this apparent conundrum. More ...

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Do stocks offer protection against inflation?

There is a common belief that a managed, diversified portfolio of US common stocks provides protection against inflation. However, there is reason to question whether this protection currently exists.
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US Bonds

The collapse of the dollar and US bonds?

The extreme spending of the Obama government, combined with irresponsible bank lending policies promoted by Barney Frank and Chris Dodd, portend rising interest rates, the collapse of the bond market, and the end of dollar supremacy. More ...

World Economy

Signs of US losing its groove?

Thirty years ago, US income from abroad was more than double the amount of income that the US paid to the rest of the world. This year, or the next, this foreign income surplus may disappear forever. Is the US 'losing its groove'? More ...

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2010-07-09 16:20