Multiple Discriminant Analysis - MDA

AAA

DEFINITION of 'Multiple Discriminant Analysis - MDA'

A statistical technique used to reduce the differences between variables in order to classify them into a set number of broad groups. In finance, this technique is used to compress the variance between securities while also allowing the person to screen for several variables. It is related to discriminant analysis, which, in simplified terms, tries to classify a data set by setting a rule (or selecting a value) that will provide the most meaningful separation.

INVESTOPEDIA EXPLAINS 'Multiple Discriminant Analysis - MDA'

Although this technique requires a fair bit of mathematics, it is relatively simple. MDA allows an analyst to take a pool of stocks and focus on the data points that are most important to a specific type of analysis, shrinking down the other differences between the stocks without totally factoring them out. For example, MDA can be used for selecting securities according to the statistically-based portfolio theory set forth by Harry Markowitz. Properly applied, it will factor out variables like price in favor of values that measure volatility (beta) and historical consistency. Edward Altman is famous for using multiple discriminant analysis in creating the Altman-Z score.

RELATED TERMS
  1. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
  2. Portfolio Variance

    The measurement of how the actual returns of a group of securities ...
  3. Harry Markowitz

    A Nobel Memorial Prize winning economist who devised the modern ...
  4. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  5. Statistically Significant

    The likelihood that a result or relationship is caused by something ...
  6. Risk Measures

    Statistical measures that are historical predictors of investment ...
RELATED FAQS
  1. What is the difference between earnings and income?

    The differences between earnings and income change depending on the context. Technically speaking, personal earnings are ... Read Full Answer >>
  2. What is the formula for calculating beta?

    Beta is a measure used in fundamental analysis to determine the volatility of an asset or portfolio in relation to the overall ... Read Full Answer >>
  3. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  4. How do I use the rule of 72 to estimate compounding periods?

    The rule of 72 is best used to estimate compounding periods that are factors of two (2, 4, 12, 200 and so on). This is because ... Read Full Answer >>
  5. How can I use Bollinger Bands® to spot options trading opportunities?

    Traders can use Bollinger Bands in a couple of different types of trading strategies. The most common strategy is using Bollinger ... Read Full Answer >>
  6. How can I run linear and multiple regressions in Excel?

    The first step in running regression analysis in Excel is verifying that your software has the capabilities to perform the ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Calculating Beta: Portfolio Math For The Average Investor

    Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own.
  2. Investing Basics

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  3. Fundamental Analysis

    The History Of The Modern Portfolio

    Learn how the writings of John Burr Williams and Harry Markowitz led to the creation of the investment portfolio.
  4. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  5. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  6. Personal Finance

    Financial Tips For People Who Hate Finance

    For people who hate financial planning, there's usually one big problem – which you can fix. Do it now.
  7. Investing

    Seven Investing Books For Your Summer Reading List

    It’s almost 4th of July, the season of summer reading. Picking up a book during your holiday can be a great opportunity to learn more investing.
  8. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  9. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  10. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!