One of the methodologies that can be used is to determine what stock to buy and
ID: 2930255 • Letter: O
Question
One of the methodologies that can be used is to determine what stock to buy and at what price, is known as Technical Analysis2.
There are many technical analysis tools available in the market place, most costing many thousands of dollars. An aspiring day trader discovers some Technical Analysis software for $200, and is interested to know if it is worth buying.
During her “free one day trial”, she performs a technical analysis on 10 randomly selected stocks. For each stock, the technical analysis software produces a prediction between A (very good prospect) and G (very bad prospect). She also collects data on the actual performance of the stock, and ranks the actual perfomance (where 1 is best.).
The data appears in the table below:
NB* Two stocks (ALK and IJF) came equal ninth.
Q a) Being careful to resolve any ties, calculate Spearman's correlation coefficient to measure the degree of association between the software ranking and the actual stock performance ranking.
Q b) Interpret this value, explaining whether or not this suggests that the software may be of value to the day trader.
MPO LLURYD BOB SEN PAT STOCK Actual stock performance ranking Software Ratin JKZM ZTEALKIJF 9* 4Explanation / Answer
Q a) Being careful to resolve any ties, calculate Spearman's correlation coefficient to measure the degree of association between the software ranking and the actual stock performance ranking.
Ans: The estimated Spearman's correlation coefficient to measure the degree of association between the software ranking and the actual stock performance ranking is 0.6545.
Q b) Interpret this value, explaining whether or not this suggests that the software may be of value to the day trader.
Ans: The estimated Spearman's correlation coefficient to measure the degree of association between the software ranking and the actual stock performance ranking is 0.6545 and the corresponding p-value is 0.04. Hence, we can not accept the null hypothesis and conclude that these variables have the positive association at 0.05 level of significance.
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