The financial world is a complex equation with hundreds of variables influenced by actions people take to generate wealth. The majority of the world’s population have little idea how to multiply their life savings and rely on the bankers and financial intermediaries to make their money grow.
The industry relies on many individuals from the entry-level clerks that handle the menial jobs to fund managers and stockbrokers whose livelihood depends on the multiplication of money in their care to as many powers as possible, earning commission on top.
The take-home pay of a fund manager is directly proportional to the growth of the funds under their care, while that of a clerk is fixed right at the bottom of the food chain. A sound competence in mathematics will take an individual very far in the financial services industry.
To illustrate how mathematics helps answer key questions at each stage of analysis, a quick look at an Apple stock chart shows that a share two years ago would have cost $96 while today it is worth roughly $184 – more than a 100 per cent increase. Apple have a sound strategy and offer exceptional returns, tempting many to invest without digging deeper.
A sound competence in mathematics will take an individual very far in the financial services industry
A fund manager who manages other people’s savings is required to be thorough. The analysis starts off with some forecasting tools that will analyse current and past data and prospect what the rate of return for the investment is likely to be in the near future.
The forecast is expected to follow a normal distribution curve with an average daily return and the next step would be to think about creating a tool that accepts an input to highlight the expected return, using a mathematical technique called regression.
Regression will attempt to fit a straight line of best fit to a scatter plot formed between Apple returns and the NASDAQ Index Returns, to find the angle of the slope. Another mathematical tool is the moving average, a method that picks up trends as the model considers not just the current price, but the current trend.
The worst case scenario is computed using another mathematical tool, known as value at risk. This tool answers the question of what maximum loss from an investment, in a particular period of time and with a particular probability is expected.
Julian Cardona is a statistician and lecturer in investment management, corporate finance and risk management at Saint Martin’s Institute of Higher Education.
The full essay can be read on https://bit.ly/2uNKsEO . Students reading for the BSc (Hons) Banking & Finance at Saint Martin’s Institute of Higher Education awarded by the University of London under the academic direction of the LSE, will be thoroughly prepared to build their careers in the financial services industry.
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