Quantitative analysis is a mathematical technique that concentrates on the riskiness of a share. It looks at the past performance of individual shares relative to the markets as a whole. It assumes that those shares that perform better than the market do so because they are riskier investments than those which perform in line with the market, and vice versa. Beta analysis, which is the most usual method of quantitative analysis, is a means of measuring the risk.
A share which has moved exactly in line with the FTSE Index is said to have a beta of one. But some shares (as well as unit trusts) go up and down more than this. These are described as aggressive, ie. when the index goes up, the share goes up relatively more, and when the index goes down it goes down relatively more. The value of beta for aggressive shares is more than one.
Some shares are described as defensive. They go up or down less than the average. Here the value of beta is less than one.
The beta of a share is a measure of how much the rate of return on shares is likely to be affected by general stock market performance and it can vary from week to week.
Some people use this analysis so that, if they think the general level of prices in the stock market is going to rise or fall, they can bet accordingly on the entire market, or so that they can bet on individual shares which may buck the trend. It isn’t necessary to go into the complexities of carrying out quantitative analysis yourself. However, look out for use of the technique, and mention of share betas, in financial newspapers, newsletters and magazines – and on websites – and use this to guide your decision.
How To Assess Riskiness
A simpler way to use quantitative analysis is to consider the three main elements which, stock market experts say, dictate riskiness. These are :
- Liquidity : How willing, or otherwise, buyers are willing to buy that share, ie. how popular it is.
- Leverage : The size of the company in relation to the cash underpinning it.
- Volatility : The degree of movement of the share in relation to share prices as a whole.
All things being equal, a high degree of leverage and volatility makes an investment more risky. An illiquid market, where buyers are scarce, also increases risk. Prices of shares, commodities and financial markets as a whole are more likely to fluctuate in these conditions.