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. Statistically Significant

    The likelihood that a result or relationship is caused by something ...
  5. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  6. Risk Measures

    Statistical measures that are historical predictors of investment ...
RELATED FAQS
  1. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  2. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    In economics and commercial law, the Herfindahl-Hirschman Index (HHI) is a widely used measure that indicates the amount ... Read Full Answer >>
  3. What does the rule of 70 indicate about a country's future economic growth?

    The rule of 70 could be used to indicate the approximate number of years that it would take a company's economic growth to ... Read Full Answer >>
  4. How is the rule of 70 related to the growth rate of a variable?

    The rule of 70 is related to the growth rate of a variable because it uses the growth rate in its approximation of the number ... Read Full Answer >>
  5. What is a "linear" exposure in Value at Risk (VaR) calculation?

    A linear exposure in the value-at-risk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >>
  6. What is the criteria for a simple random sample?

    Simple random sampling is the most basic form of sampling and can be a component of more precise, more complex sampling methods. ... 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. Fundamental Analysis

    What is a Representative Sample?

    In statistics, a representative sample accurately represents the make-up of various subgroups in an entire data pool.
  7. Economics

    Explaining Financial Analysis

    Financial analysis is a general term that refers to using financial data to make business and investment decisions.
  8. Fundamental Analysis

    How to Calculate a Turnover Ratio

    A turnover ratio measures a mutual fund’s level of trading activity in a given time period, usually a year.
  9. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  10. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center