Stock Market Probability: Using Statistics to Predict and Optimize Investment Outcomes, Revised Edition [Hardcover]

Joseph E. Murphy (Author)

Book Description

ISBN-10: 1557385645 | ISBN-13: 978-1557385642 | Publication Date: April 1, 1994 | Edition: 2

This book describes how to use statistical techniques to manage risk and improve returns. By estimating the probability of various investment outcomes in advance, investors can make better-informed decisions. Joseph Murphy shows how statistical tools and techniques such as standard deviation, dispersion and distributions can be profitably applied to the stock market. Completely updated and revised it provides investors with a sound and rational method for beating the market. Specific topics include: Statistics and historic stock market returns; Calculate the odds of an advance or decline in a stock; Estimate returns on a mutual fund; Diversification through time; The five laws of finance.

Product Details

• Hardcover: 225 pages
• Publisher: McGraw-Hill; 2 edition (April 1, 1994)
• Language: English
• ISBN-10: 1557385645
• ISBN-13: 978-1557385642
• Product Dimensions: 9.3 x 6.4 x 0.9 inches
• Shipping Weight: 1.3 pounds
• Average Customer Review: 3.6 out of 5 stars  See all reviews (5 customer reviews)
• Amazon Best Sellers Rank: #157,463 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

15 of 16 people found the following review helpful:

4.0 out of 5 stars Read this book before you invest in your next growth stock, June 30, 2000

By 

Rob Ryley "Robert" (Northeast NJ) - See all my reviews
(VINE VOICE)   

This review is from: Stock Market Probability: Using Statistics to Predict and Optimize Investment Outcomes, Revised Edition (Hardcover)

If you aren't too familiar with statistics, this book will be a challenge. Nevertheless, it is a very valuable book, and will help you separate fact from fiction on wall street.

Good points: Learn how to use probability theory to determine the expected returns of a stock, its likelihood of profit (or loss), change in margins, etc. Of particular interest--learn how to estimate the standard deviation of a stock's returns by using its high and low prices. This can save some significant number crunching, and you can use another short-hand rule to estimate the annual standard deviation from daily, weekly, or monthly data.

Of special importance are the 5 laws of finance-especially law 2. Law 2 states simply: You cannot use historical percentage changes in growth to predict future changes (more technically, past percentage growth has no correlation to future growth). What does Wall Street try to do--predict future growth by past growth (William O'neil readers take note.) A history of rapid growth is no guarantee of future growth. Likewise, a history of poor growth is no guarantee of poor future performance. Maybe Ben Graham was right after all.

The one reviewer who said it is typical "technical analysis" must not have read the same book. The main premise is that stock prices follow a "random walk"--meaning you cannot use simple technical rules to predict future returns with any degree of accuracy.

The author also pokes some holes in the components of "efficient market theory" especially CAPM. Beta as a description of an individual stock's price moves is questioned.

Bad Points: The lognormal distribution was not explained in enough detail. This is a significant flaw, as the rest of the book requires understanding of this vital concept. Once you can get that, you will reap immense benefit from this book.

28 of 33 people found the following review helpful:

2.0 out of 5 stars California Institute of Technology Graduate Student, March 8, 2000

By 

David R. Kent (Los Alamos, NM USA) - See all my reviews
(REAL NAME)   

Amazon Verified Purchase

This review is from: Stock Market Probability: Using Statistics to Predict and Optimize Investment Outcomes, Revised Edition (Hardcover)

I do not recommend this book for the following reasons.

1) It could be summarized in 5 pages

2) Some of the assumptions used in the model are not valid

3) I tested the model and it does not work

4) few equations makes it difficult to follow at some points.

There are some major shortcomings in this book. Major ones include assuming that the change in the log of the price of a stock is a gaussian random variable and that day to day prices are not correlated. I tested this and it was not true in any of the cases I tried. The world is not gaussian and events are often correlated.

For purely academic reading, this book may be interesting, but I suggest that anyone doing so supplement their reading with some real-life statistics of their own.

2 of 5 people found the following review helpful:

5.0 out of 5 stars Great reading for the sophisticated trader!, January 30, 1999

By A Customer

This review is from: Stock Market Probability: Using Statistics to Predict and Optimize Investment Outcomes, Revised Edition (Hardcover)

Joseph E. Murphy has formulated a unique probability and statistical approach to investing. The book is easy to read and each chapter is clearly divided by subject matter. This makes it easy to use as a desk reference.

Nevertheless, Murphy's concepts make too much sense for the average compulsive investor. I recommend this book only for sophisticated traders.