Appendix X: Screening stocks based on the rational approach to decision-making

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363-386I propose a rational approach (RA) to decision-making process which, I believe, can be adapted as an alternative methodology for screening stocks. Subject to various constraints (e.g., budget, time horizon, market scope, etc.), the proposed methodology requires the consideration of several alternatives and criteria, assignment of weights of importance, and grading. Undoubtedly, decisions based on the RA ought to be characterised as rationally subjective. Naturally, the degree of rationality ought to be dependent on the capability of the decision maker to legally collect information based on the asset's history, present performance of the issuing firm, and future forecasts; of course, the higher the degree of rationality the more efficient speculator the investor would be. Using a sample of 257 randomly selected stocks I determined their future values by relying on unevenly weighted criteria related to asset's history, present performance of issuing firm, and future forecasts. After each stock was screened, a total score (TS) per stock was calculated; in turn, the stock TS was used as a test variable against future market price performance. Using receiver operating characteristic (ROC) analysis and various tests based on it, I determined the cutoff point of the TS test variable above which it pays to consider stocks favourably for inclusion in a portfolio. The results, although statistically significant at high levels, were characterised as weak and time horizon dependent: they produced an accuracy rate of about 60% for a short time horizon and about 58.5% for a longer time horizon. 'Weak' though does not mean valueless: improved evaluation of stocks, shorter or longer time horizon between evaluation time and market testing, sample nature (industry-specific, local, and international) and size of sample may yield higher accuracy. Thus, searching for a cutoff point as proposed in this study is somewhat valuable for the identification of valuable stocks.
1 Introduction
2 Screening based on the rational approach to decision-making
3 Maximisation of accuracy
4 Longer time horizon
5 Summary and conclusions

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