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Quantitative Business Analysis
Introduction
Stock market indices is a perfect example of a random stochastic process. With so many
variable at play, one can never be so certain about any given performance of a companys stocks.
Scientist, economists and financial analyst have however list some of the key market indicator
which are likely to alter the performance of the overall stock market. Of great value is the gross
domestic product, GDP, and the consumer price index, CPI. These two figures indicates
economic performances of any one state and are likely to influence investors choice of an
investment destination. Other valuable figures are the housing price index, producer price index,
interest rates and unemployment rate. It should also be noted that GDP, better determinant when
used in comparison to other key players in the economy.
Problem Statement
In order to determine the volatility of the United States stock market performance, two
models have been put forth with Standard & Poors 500 (S&P 500) stock market indices used as
the basis of analysis due to its crucial role in influencing the overall Americans financial market.
A set of hypotheses have been put forth concerning the correlation of the above enlist economic
indicator and the suitability of each of the two models prescribed. What we really, do not know
for sure is whether these assumptions are true and that the models are a true representation of the
American stock market.
Objective
To determine the statistical relationship between the set variables by conducting the relevant
statistical measures of associations.
Plan of Investigation
The first step to analyzing the data provided under the appendix section is to conduct a
regression analysis of the two models and determine the effectiveness of the two models in

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predicting stock indexes. This will be followed by a across examination of the assumptions made
in building the two models in order to ascertain their validity and reliability. To facilitate this
process, well consider a regression and correlation analyses in excel and attach the appropriate
outputs in the appendix for further illustrations.
Analysis
Model One:
Stock market: S&P500 (Percentage Change) = 0 + 1 *(Annual CPI) + 2 * (Annual Average
PPI) + 3 * (Annual Average House Price Index) + 4 * (Annual Average Interest Rate) + 5 *
(Percentage Change of Annual Average GDP of US) + 6 * (Percentage Change of Annual
Average GDP of Spain) + 7 * (Percentage Change of Annual Average GDP of Germany)
Regression Analysis
From our regression analysis, we have: R2 = 0.901 with a standard error of 1.5426 at 95%
confidence interval. From the p-values column, it is clear that most figure stay well below the
required threshold of 0.5 except for the probability of wrongly predicting 0 and 3, at 0.8472
and 0.5826 respectively
Model Two:
S&P500 (Annual Average) = 0 + 1 * (Annual CPI) + 2 * (Annual Average House Price
Index) + 3 * (Annual Average Interest Rate) + 4 * (Average Annual Unemployment Rate) + 5
* (Annual Average GDP of US) + 6 * (Annual Average GDP of Germany) + 7 * (Annual
Average GDP of China)
Regression Analysis
From our multiple regression analysis, the regression coefficient R2 = 0.878032 with a standard
error of 197.464 at a 95% confidence interval. Again, the probabilities of committing type II
error is well below 0.5 threshold, save for 0, 1 and 7, at 0.617, 0.9754 and 0.5349
respectively.
Discussion
Comparing the two models, model one provides a higher regression coefficient (0.901)
than model two (0.8708), indicating a stronger relationship between the predicted stock values
and the actual values observed in model one. Further, the same trend is apparent for the

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individual variables postulated. From the probability values, it is evident that most predictor
variables in the case of model one poses lower risks in predicting the stock price indices
compared to model two that has three of its independent variables showing high volatility
characteristics.
Conclusion and Recommendations
The multiple regression results verifies the first model as the most accurate and reliable in
predicting the United States stock prices and not the second model as was originally assumed.
Chinese GDP does not a very good predictor of the U.S. economy and using this as a basis
presents high risk of making wrong predictions by over 50%. As a business analyst I recommend
the use of the first model which should also be refined to eliminate risks posed by the high pvalues.

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Appendix
Model One Regression Results

Model Two Regression Results

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