A steep drop for a
Wall St. darling raised the question: Do I take profits (short term "reversion to the mean") or hold out for further declines?
One consideration was to calculate how rare a 10% single day
drop for GS is. I downloaded 3 years of market data, and ran it
through Excel's Analysis Toolpack(x̄=2%, σ=3%) Based on this standard deviation, a Z-score of +2.98 placed it in the 99.86th percentile of its typical daily volatility. Conclusion: Since it was extraordinarily rare for GS to fall this much in a single day, I
closed out the position anticipating a (short-term) rebound. The position was initiated qualitatively, but closed quantitatively.
I
decided to bring this real-life situation into the classroom.
First, I showed students how to replicate the research.
Next, they applied the methodology on several other data sets, in order to further investigate the efficacy of this methodology.
This lesson was an opportunity to:
Use statistics to enable data driven decision-making.
Discuss
impacts of business ethics (or lack thereof, in Goldman's case) and
field incidental questions about stocks, investing, and personal
finance.