Attempts to describe stock market more accurately have been made from the moment of its formation to the present day. Every day researcher minds create new ideas, later embodied in new techniques, models, and paradigms. But far from all approaches pass the test of time. Many die due to lack of efficiency. Those remaining are not great in numbers, but they have been proved repeatedly and deserved their canonization by Nobel Prizes in the field of economy. They have proved their exclusive efficiency over many years a lot of times. Just as in other areas, a model, having deserved good reputation over the years, does not grow old - it becomes classic. In the stock market, there are such classic models, too, and now they are available to you, not just to a narrow circle of specialists.
CAPM (Capital Asset Price Model) |
CAPM abbreviation stands for Capital Asset Pricing Model. This model was developed by a number of prominent financial market researchers, first of all, by Nobel Prize winner William Sharpe, as well as John Lintner, Jack Trainor, and Jan Mossin.
When carrying out some assumptions of the stock market character, which you can familiarize with in more detail here , the model binds expected yield of the asset selected by you (or your portfolio) with expected yield of some market portfolio, typically one of the major market indices, for example, S&P500. In other words, you can estimate change in your asset price over some period of time if somehow - using your own reasons or with one of our tools - you managed to estimate change in the market index for the same period.
Besides you can estimate sensitivity of selected asset to any market index, define systematic and non-systematic risks, find out whether the current market price matches the price of model the asset is overvalued (undervalued). CAPM Analysis Tools are here
APT (Arbitrage Pricing Theory) |
The arbitrage pricing theory was born as an alternative to CAPM. Many people were not satisfied with assumptions made in CAPM model, so in 1976 professor Stefan Ross developed his own pricing theory constructed on arbitration arguments only. There are several types of arbitrage, but the general meaning of this term is extraction of no-risk profit with no costs. The theory is based on one basic statement - arbitrage in balanced market is impossible (market "liquidates" such a possibility fast).
With APT pricing model you can make a fuller and higher quality analysis of assets selected, taking into account influence of non-market factors on the price. You can find more information on APT based product family here
Portfolio Optimization Theory |
Historically this theory appeared first among classic approaches. Harry Markowitz, later awarded with the Nobel Prize in economics, presented it to the attention of the world community in 1952.
What was new in this theory for financial analysis, what "discovery" did its author make to receive such an honorable award? Nothing special, the author just created a miracle for the financial world, which until now is sometimes refered to it as "Markowitz Diversification Miracle". After he had managed to translate extremely applied financial problem into the language of mathematics, it turned out that it was possible to form of the given set of assets such portfolios, which at identical expected yield level could have several times lesser risk as compared to others. Moreover, he proved that it was impossible to create a more effective portfolio of the given stocks - it simply didn't exist.
You can find a more detailed information on Portfolio Optimization Theory and the list of services for applying this theory in trading here
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