What Is Quantitative Analysis?

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DEFINITION
Quantitative analysis is any type of analysis that relies on quantitative factors, namely things such as a company’s revenues, price-to-earnings ratio, and other metrics.

Quantitative analysis is a method of investment research that primarily involves data and hard numbers. Quantitative analysts use math and formulas to try to predict outcomes, rather than less-objective, qualitative factors. Often, quantitative analysts are involved in helping financial companies determine how to price assets or securities they wish to sell.

If you want to learn more about quantitative analysis, we’ll break down everything you need to know.

Definition and Example of Quantitative Analysis

Quantitative analysis is any type of analysis that relies on quantitative factors, namely things such as a company’s revenues, price-to-earnings ratio, and other metrics. The goal is to identify trends or characteristics that may indicate an opportunity for gains.

This contrasts with qualitative factors, such as a business’s reputation or the quality of its management team, which can’t really be distilled into a mathematical formula.

For example, someone using quantitative analysis to try to decide whether to purchase a stock may calculate the business’s revenue growth over the past few years, or look at the company’s ratios and how those ratios compare to other, similar companies.

Quantitative analysis can often be related to technical analysis, as both use data and trends to try to predict future outcomes. Technical analysis is more a visual expression of data, whereas quantitative analysis deals in numbers and algebra.

Some popular stats quantitative analysts use include price-to-earnings (PE) ratios and earnings-per-share (EPS). According to quantitative analysis, if there are two similarly valued companies and one has a higher EPS or a lower PE ratio, that may be the better investment opportunity.

How Does Quantitative Analysis Work?

Quantitative analysis is used in many aspects of investing and business. One common way it works is by comparing data sets. If a quantitative analyst can look at economic data such as GDP growth or inflation and identify a similarity to a pattern that occurred in the past, they may be able to predict what is about to happen to a company’s stock.

Other types of quantitative analysis include financial modeling, optimization, and data mining. For the individual, “quant” investing can be a matter of one or two metrics, whereas an investing firm could use voluminous amounts of data to make buy and sell decisions.

Business managers often use quantitative analysis to forecast future sales, which lets them manage inventory. If a manager can identify busy and slow times of the year, or even of the week or month, they can plan inventory orders and staffing to optimize business performance.

Anything for which data can be collected and tracked is open to some type of quantitative analysis. These days, massive amounts of data are created and stored every day. Many quantitative analysts use powerful computer programs and models to try to find the most useful data and to identify patterns or correlations.

Quantitative Analysis vs. Qualitative Analysis

Quantitative Analysis Qualitative Analysis
Relies on data and numbers Relies on more ephemeral concepts, such as reputation
Can help investors analyze investment opportunities Can help investors analyze investment opportunities

Source of Information

Investors using quantitative analysis rely on hard numbers and other reliable forms of data. Things such as revenue numbers, share prices, and other factual information are the inputs they use when performing an analysis.

By contrast, qualitative analysis relies on things that are difficult to quantify or for which people might have differing opinions. Investors using this method of analysis may try to determine a company’s reputation or the effectiveness of a business’s management group. This can involve things such as surveys or focus groups to quantify consumer sentiment.

Useful for Analyzing Investments

While some may feel qualitative analysis is inferior to quantitative analysis because it does not rely on hard facts and figures, both play important roles in investment research.

Consumer and investor opinions both play major roles in the performance of a company, just as its revenue, profits, and other financial numbers do. Investors can gain valuable insights from both forms of analyses.

Pros and Cons of Quantitative Analysis

Pros
  • Relies on numbers and data

  • Available techniques range from simple to complex

  • Low cost

Cons
  • Not everything can be distilled to numbers

  • No quant method is perfect every time

Pros Explained

  • Relies on numbers and data: Quantitative analysis often looks at factual information, which means it is easy for investors to learn about and calculate.
  • Available techniques range from simple to complex: Even beginners can use simple techniques, such as finding a business’s PE ratio. However, more advanced investors use quantitative analysis to look at much larger and more complex amounts of data.
  • Low cost: The data that an individual investor can use for quantitative analysis is typically freely available on any number of financial websites.

Cons Explained

  • Not everything can be distilled to numbers: Quantitative analysis excludes things that are hard to convert to simple numbers, such as consumer and investor sentiment, quality of management, or company culture.
  • No quant method is perfect every time: Quantitative analysis is one tool investors can use to predict future results, but even if an investor identifies a pattern that is similar to one that has occurred in the past, there is no guarantee that the future will play out the same way.

What It Means for Individual Investors

Everyday investors probably use simple quantitative without even realizing it. If you’re looking at things like a business’s revenue and expenses, or popular ratios such as EPS or PE ratios, you’re already using quantitative analysis.

Basic quantitative analysis techniques are a useful tool for investors who want to research and compare companies. However, keep in mind that it excludes many qualitative factors that also play important roles in an investment’s success.

Key Takeaways

  • Quantitative analysis involves researching investments using numbers and data.
  • Popularly used ratios in investing, such as earnings-per-share or price-to-earnings ratios, are forms of quantitative analyses.
  • Quantitative analysis excludes important qualitative factors, such as company culture and brand loyalty, that also are essential in investment research.

Article Sources

  1. Andrew W. Lo, Harry Mamaysky, and Jiang Wang. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Page 1706. The Journal of Finance. Accessed Dec. 17, 2021.

  2. Magma Capital Funds. "What Is Quantitative Investing?" Accessed Dec. 17, 2021.

  3. Michigan State University. "Understanding the Difference Between Quantitative and Qualitative Analytics." Accessed Dec. 17, 2021.