Striving for the Edge in Investing: A Statistical Analysis on the Current Asset to Market Capitalization Ratio

Abstract

A new ratio pertinent to the energy sector, as defined by Google Finance, the current asset to market capitalization ratio, was created and analyzed to determine its utility as an investment aid, using z statistics. Fifty-five companies with a current asset to market capitalization ratio of 0.3 or higher were chosen along with seventy-eight randomly selected companies within the same sector. The fifty-five companies had an average year-over-year return of 54.49% with a standard deviation of 106.72%, while the randomly selected companies returned a year-over-year 18.42% with a standard deviation of 65.2%. The null hypothesis stating there were would be no difference in gains between these two groups of companies was tested using an alpha of 0.025, and yielded a p-value of 0.013. The claim that no difference exists was rejected. A confidence interval was created in order to determine a range where the actual average difference in performance gain between these two company sets exists. The actual average difference, p, was found to occur, with 99% confidence, between 4.4% and 67.8%. The results of this study suggested that if one had money to place in the energy sector, one should look at companies containing a current asset to market capitalization of .3 or higher, for maximum return on their investment.