To answer our questions, we will use a data set collected from Kaggle. The data set contains 4,000 listed stocks with their financial ratios. In total, they have 200 financial ratios, which is all the financial ratios that are out there. The time span of the data ranges from 2014 to 2018.
Project Proposal
For almost a century, economists have tried to theorize the stock market trend. They could not find any relevant, predictable pattern and concluded that the stock market follows a random walk pattern. The 2013 Nobel Prized Fama developed the most famous theory in the 1970s. This theory is called the efficient market hypothesis (EMH), which asserts that information is fully incorporated into the price. In other words, stocks do not display any relevant information that can be used for predictions. However, some investors have made a fortune from the stock market, contradicting Fama’s theory.
In this project, we would like to verify the validity of the EMH. Under such theory, financial ratios could not be used for prediction. Yet, many financial advisors recommend the use of some. In this project, we will use the most widely used financial ratio to see if they impact the market trend. We will divide the financial ratios into their respective categories and see if any category impacts the market trend. Another idea would be to check the usefulness of the DOW theory. Our last question will look at the top 10 stocks of each industry, create an average value of their financial ratio, and then compare them to the DOW index.
To summarize, our big question is: does the financial ratio impact the market trend? To solve this question, we will divide it into three small ones. Does one of the financial ratio categories matter more than the others? Is the DOW theory a successful method for investing? Finally, does a specific industry financial ratio average do better than the others? To answer our questions, we will use a data set collected from Kaggle. The data set contains 4,000 listed stocks with their financial ratios. In total, they have 200 financial ratios, which is all the financial ratios that are out there. The time span of the data ranges from 2014 to 2018.
Work cited: Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383. doi:10.2307/2325486 Corporate Finance Institute. “Financial Ratios.” Corporate Finance Institute, Corporate Finance Institute, 28 Jan. 2020, corporatefinanceinstitute.com/resources/knowledge/finance/financial-ratios/. Accessed 28 Apr. 2021
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