Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

March 31, 2022

Precision vs Recall Trade-off

Explaining using a real-world scenario

One of the key points that data scientists should ask end-users is: How much importance do they give to the accuracy of the prediction? For instance, when I work from home, I am not much worried about the afternoon snowfall prediction. Whereas when I go to work, that is very important to me.

A few years back installed my first doorbell camera, I was very excited to seeing motion alerts on my phone. Gradually the alerts started to annoy me. 

All I was interested was alert about human movements near my house. But I got alerts for even leaves swaying in the wind. Then I explored the camera motion settings and lowered the sensitivity. Though it stopped a lot of unnecessary alerts, it also blocked many real alerts from coming in especially after dusk or  at times with low visibility.

Then I decided on changing the setting twice a day, both morning and evening. The following images show how my doorbell camera responded to movements during daytime and night.

Image by author.

Image by author.

That gave me the level of alerts I wanted, but it became an hassle changing the settings twice a day. So finally, I settled with one permanent setting in the middle which was neither too good or bad. I now get more alerts than I want during day and miss some during night. The following image show how my doorbell camera responded to the current settings.

Image by author.

What I really wanted with my current setting was a good level of alert accuracy in the morning. I wanted the Doorbell to alert me only the human movements like delivery drivers coming in, postman etc. Whereas at night, I was willing to tolerate a low alert accuracy level to avoid missing alerts.

Analyzing the alert counts

In order to reach this middle setting, I actually had quantified the accuracy of the settings in my mind, even without realizing it. What I really did was adjusting the trade-off between Precision and Recall. 

Precision measured how successful I was in receiving human movement alerts for a setting, without receiving any non-human movements falsely as human movement alerts. Any non-human movements which were falsely alerted as human movement (False positive count) penalized the precision.

Mathematically:

Precision = True Positive count / (True positive count + False positive count)

Now take a look at the alerts from my old morning setting.

Image by author.

Based on the above formula for precision:

Precision = True Positive count / (True positive count + False positive count)

               = 2 / (2 + 0)

               = 2 / 2

               = 1.0 or 100%!!!!

This implied that I had a high accuracy, but in reality the Doorbell missed alerting 3 human movements.

That is where Recall comes into picture. It measures the true positive rate, which is way to determine if all the 5 human movements were alerted. Any missed human movement (False negative count) alerts were penalized.

Mathematically:

Recall = True Positive count / (True positive count + False negative count)

           = 2 / (2 + 3)

           = 2 / 5 

           = 0.4 or 40%     

Now, let's look at the evening setting.

Image by author.

Precision = True Positive count / (True positive count + False positive count)

               = 5 / (5 + 2)

               = 5 / 7

               = 0.71 or 71%

Recall = True Positive count / (True positive count + False negative count)

           = 5 / (5 + 0)

           = 5 / 5 

           = 1.0 or 100% !!!

Here, since all human-movements were alerted, Recall became 100%. But the Precision calculation was penalized for alerting non-human movements as human.

Finally, let's look at the current setting.

Image by author.

Precision = True Positive count / (True positive count + False positive count)

               = 4 / (4 + 1)

               = 4 / 5

               = 0.8 or 80%

Recall = True Positive count / (True positive count + False negative count)

           = 4 / (4 + 1)

           = 4 / 5 

           = 0.8 or 80% 

Here, I didn't even have a vague idea that the Precision and Recall will mathematically balance when I applied the final setting! But it happened. 

Analyzing the alert counts

A quick way to look at the counts is using a confusion matrix. Here the Precision and Recall are also shown along with the confusion matrix.  As you would notice, when Precision goes up Recall goes down, and vice-versa. Your desired value is based on what problem you are trying to solve, as explained with the morning, evening and current setting.  


Image by author.

F1 Score

In most modern cars, the dashboard shows you a miles per gallon (mpg) metric. You would see the mpg increasing upto a certain speed and then going down. Say after 55 miles speed, the mpg decreases. The downside is 55 miles speed could increase the time to your destination when you are allowed to go upto 75 miles on a highway.

I really wished there was a one single metric in the dashboard that could give me an optimum speed / mpg combo. Like 100 means I am at an optimum speed and mpg, whereas 35 means I am making a poor choice in terms of optimizing. 

Luckily in the case of accuracy calculation, there is metric called F1 score which combines both Precision and Recall. F1 score is the harmonic mean of Precision and Recall. In simpler terms, if any of the values are low, F1 score is low. It gives more weightage to low values as compare to a regular mean that gives equal weightage to both low and high values.

The equation for F1 is:

F1 score  =    2 / (1 / Precision  + 1 / Recall)

Computing the F1 score for the three scenarios:

Morning-

F1 score  =    2 / (1 / 1  + 1 / 0.4)
   
               =.   2 / (1 + 2.5)

               =    0.57

Evening-

F1 score  =    2 / (1 / 0.71  + 1 / 1)
   
               =.   2 / (1.4 + 1)

               =    0.83

Current-

F1 score  =    2 / (1 / 0.8  + 1 / 0.8)
   
               =.   2 / (1.25 + 1.25)

               =    0.8

These numbers shows you that your Evening and Current settings were more optimal compared to Morning. But between Evening and Current, which one to choose? That should make me think again, what problem am I trying to solve?


     


March 20, 2020

Quadruple Witching

Quadruple Witching refers to the 3rd Friday of every quarter i.e March, June, September and December.

This is the trading day when:

  • market index futures, 
  • market index options, 
  • stock options and 
  • stock futures
expire.

There'll be increased volatility on this day.

The last hour if these trading days (3-4pm EST) is referred to as Quadruple Witching Hour.

Ref: https://investinganswers.com/dictionary/q/quadruple-witching

April 10, 2019

Spread


Offer/Ask price: $100.50
Bid price: $99.50
Spread = 100.50 - 99.50 = $1.00

FIX protocol and FIXadtl

Financial Information eXchange (FIX) is a messaging protocol used to exchange trade related messages between trading systems.

FIXatdl (FIX algorithm trading definition language) is a language for trading that relies on FIX protocol.

March 29, 2019

Basis Points

1 basis point = 1/100 of a percentage. Used mainly in Finance like changes in interest rate.
Example:
"The Federal Open Market Committee unanimously voted to increase the federal funds rate by 25 basis points to 1.75% to 2%" https://www.housingwire.com/articles/43672-fed-raises-rates-for-second-time-in-2018


Unicorn

With many unicorn IPOs getting listed in 2019, one question is "what is a unicorn?"

Wikipedia states:
Unicorn is a privately held company valued over $1 billion. The term was coined after the mythical animal due to the statistical rarity of such successful ventures.

NYTimes in an article on March 28, 2019 (day before the Lyft IPO) https://www.nytimes.com/2019/03/28/business/startups-ipo.html?action=click&module=Top%20Stories&pgtype=Homepage has an observation about why some startups with high valuations stay private for long.

"Some industry groups and investors who urge fewer regulations say the emphasis on the private markets is an outgrowth of the Sarbanes-Oxley Act, the federal law passed in 2002 that tightened accounting rules for public companies after the accounting scandals of the early 2000s."


March 25, 2019

Spider - SPDR

Stands for Standard & Poor’s Depository Receipt. It is a S&P 500 index based ETF maintained by State Street Global Advisors. Each share of the ETF contains a 10th of the S&P 500 index and traded at roughly a 10th of the dollar value of S&P 500.

Ref: investopedia

Leading and lagging economic indicators

Leading indicators 
1. Stock market 
2. Manufacturing activity 
3. Inventory levels
4. Retail sales
5. Building permits
6. Housing market
7. Level of new business startups

Lagging indicators 
1. Change in GDP
2. Income and Wages
3. Unemployed rates
4. Consumer Price Index for Inflation
5. Currency strength
6. Interest rates
7. Corporate profits 
8. Balance of trade - trade surplus level
9. Value of Commodity substitutes to US Dollar - against gold and silver

March 14, 2019

Evaluating bank stocks

Ref: Motley Fool youtube. https://www.youtube.com/watch?v=AfT5FaaqNxI&list=PLXIJDn8_-fyEsbjwBto2GzIS1JPq5I2iR&index=8

Objective of banks: Borrow money at a lower interest rate and lend at a higher rate, and make profit from the spread.

3 key metrics:

1. Annual Return of Equity for 10 years. Find the lowest number. If that number is negative, bank had big losses during the 2008 financials crisis. So avoid them. Return of Equity is available in SEC 10k or q filing.

Return of Equity = Annual Income / Shareholder Equity = Annual Income / (Total Assets - Total Liabilities)

Ideally Return of Equity should be greater than 10% and for good banks it should be 15%.

The Return of Equity may be very high some months during good economic conditions if bank underwrite bad loans, which will turn bad later. That's why we need to look many years.

2. Discipline of the bank measured by Efficiency Ratio.

Efficiency Ratio = Operating Expenses / Total Revenue

Typically this ratio will be between 50-60%. If the ratio is greater than 60%, it means the financial discipline of the bank is ideal.

3. Sales Profitability

Sales Profitability => Top-line Revenue or Gross sales / Asset > 4.5%





Shareholder's Equity

Suppose if a company is liquidated today i.e. all assets sold off and liabilities paid off, then the amount of money left for the shareholders is the Shareholder's Equity.

Shareholder's Equity = Total Assets - Total Liabilities

Ref: investopedia

Where to find SEC filings?


It's available on EDGAR (Electronic Data Gathering, Analysis, and Retrieval) website.

Can retired shared be reissued?

No. Whereas Treasury stocks can be.

Authorized vs Issued vs Outstanding shares

Authorized is the number of shared permitted for a company as part of their incorporation. This can increase after the initial formation.

Issued is the subset of the Authorized which is actually sold to investos.

Outstanding is Issued minus Treasury shares. Treasury is shares bought back by the company but not retired.

Treasury Stock

When a comany buys back its own shares and doesn’t retire them, those shares are called Treasury Stock

Shares Outstanding vs Float

Shares Outstanding is the total amount of shares that exists for a company. Float is is actual amount available for trading after subtracting the restricted shares.

March 13, 2019

Quantitative Easing (QE)

Unconventional intervention by the Central bank to simulate economy by large scale purchase of government assets like bonds and securities. This helps government to introduces large scale money into the economy (or increase money liquidity). The net effect is it lowers interest rate thereby increasing money supply overall.

Law of diminishing returns

In economic, the law of diminishing returns states that the output produced (e.g. materials created, quality of the product etc) increases proportionally to the input (e.g. time put, resources used etc). But  beyond a point, called Point of Diminishing Returns, addition of input only leads to decreasing rate of output.

Cyclical stocks

Stocks which are higly correlated to economy. They drop during recession and go up during economic expansion.

Fiat vs Commodity currency

Fiat is a legal tender whose value is backed by a government. Currency whose value is tied to a commodity like gold or silver is commodity money. US dollar is a fiat currency.

S&P Sector performance for past 1 year

Recorded on Mar 13, 2019

S&P average: +0.31%
























Ref:  http://www.sectorspdr.com/sectorspdr/tools/sector-tracker