Is there a way to predict exchange market returns in future?(conceptual idea)
Our stocks are always correlated to our main market index .But how much effect of stock market index can be applied to the stocks is the main query.If this information is available then it will be free lunch for everyone living in this world and will never face money crisis because of so many free lunches available in this world.But this is not the case .In a market if everyone knows a particular model then it is useless to work on that model because oppurtunities must already be exhausted and no more money could be earned(rather lost).
So a simple model can explain returns on market index by a stock that is forming relationship btw stock and the index.like if an index move by a 1 unit our stock moves by 0.5 unit.this is the degree of responisiveness of our stock whereas if market goes up our stock goes up as well.
so in turn we formed a relationship which is with the flow of market index and ouur stocks move by 50% in value.(assumption).
Now we know that if stock selling at some particular index then we can make out the price of our stocks.But the main point here is to identify the bullish or bearish state of markets .If we dont know that then its not possible to make profits anyways.
So still our positioned is hedged (safe)only half way . now with the help of some technical analysis explained below we can make out bullish and bearish phase. and hence to some extent our investments are more secured.
There are lots of models for regressing the index variables with stock variables like CAPM,APT,FAMA FRENCH,ETC.
now regressing some part of market returns and calculating the risk assoiated to that factor invstments we can make out some proportions of our future earnings on our investments.