by oldprof

Test Your Quantitative IQ

What skills are needed for an individual investor managing his or her own account?  Is the problem different for an investment advisor?  For a trader?

Anyone making financial decisions needs quantitative skills.  This means more than writing a paragraph that includes numbers.  It means understanding how to interpret and analyze data.

An Interesting Problem

Today’s problem provides an interesting test of your "Quantitative IQ."  We shall check the response from different audiences to figure out a grading scale!  Meanwhile, try your own hand.  Look at the table below, taken from a weekly report by the St. Louis Fed.  (click table to enlarge)

Mzm_changes

The table will not win any prizes from Edward Tufte, and that makes it a little more challenging.

This is the kind of problem we might have presented, back in the day, as an exam question. Let us approach it that way.  MZM is a measure of money supply, reported on a weekly basis.  Feel free to use additional information from the report to help, but it is not really needed for this purpose. 

How many of these questions can you answer:

  1. What is on the horizontal axis?
  2. What is on the vertical axis?
  3. What is represented by a specific cell?
  4. Why does the table not include values for each possibility?
  5. What is the last time period represented in the table?
  6. How is the value for a given cell calculated?
  7. Why might a table like this be useful?
  8. What is your overall interpretation?

Solutions

In a day or two we shall post answers to the questions, and show the significance of the problem.

in Individual Investors / Interpreting Data / Trading 2 comments

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2 comments

  • Zero Beta October 17, 2007  

    I checked this out under your recommendation. Let me see if I have what it takes to model CDO’s.
    1. Last day of a four week interval ending at day x.
    2. Last day of a four week interval ending at day y.
    3. The annualized rate of change in MZM, as measured by the difference between the average MZM level in interval X, and the avearge MZM level in interval Y.
    4. Most possibilities are not that, they are not possible. They are essentially creating different moving averages. They therefore need at least 4 week intervals between the data points.
    In the case of January and February, I don’t know why they leave the data points, but I venture to guess it has something to do with the leap year Since you can’t go backwards, the upper echelon is blank.
    5. 8/6/07 to 9/4/07
    6. (1+[(Y-X)/X/(12/n)])^ (12/n)
    where
    X: average MLM level over interval X
    Y: average MLM level over interval Y
    n: number of 4 week periods in the interval
    7. This is useful to determine how quickly money supply is growing as well as any seasonal effects. If you look at the latest date on the Y axis you can see the growth in MZM supply going up until that date. The bottom left is a 1 year average, whereas the bottom right is one month average. It is speeding up. In our case, it has sped up considerably. Since this is smoothed, big changes are noteworthy because they are most likely understated.
    8. I’ll sell you my dollars for a nickel.

  • RB October 23, 2007  

    Re: interpretation, let me take a shot — the least noisy metric is YoY change which is 11.8% from 10/06 to 10/07.