[01] Carol Anne Hargreaves, Department of Statistics and Applied Probability, Faculty of Science, National University of Singapore, Singapore. [02] Hu Yiming, Department of Statistics and Applied Probability, Faculty of Science, National University of Singapore, Singapore. [03] Jariah Bte Abdul Nassar, Department of Statistics and Applied Probability, Faculty of Science, National University of Singapore, Singapore.

Introduction: Investors continuously seek for a “strategic secret” to identify potentially profitable stock portfolios. Objective: The objective of this study is to systematically identify top performing stocks in different sectors of the Australian Stock Exchange, using three simple statistical techniques: Pearson Correlation, trend analysis and Principal Component Analysis (PCA). Methodology: Investors want to buy stocks that can give them good returns. We apply the Pearson Correlation technique to identify stocks whose prices are positively correlated with time, stocks which have a positive, upward trend in the most recent weeks. Secondly, investors also want to know why they should buy a particular stock and are interested in knowing the important factors only, while trying to keep their decision making as simple as possible. Principal Component Analysis is a statistical technique that reduces many predictor variables to a few factors. Results: Our results demonstrated that the Pearson Correlation analysis and the Principal Component Analysis, coupled with a simple short-term trading strategy was reliable in identifying winning stock portfolios in the Australian stock market. Our stock portfolios consistently reaped profits across consecutive time periods for different sectors. In addition, our stock portfolios in all three trading periods outperformed the Australian Stock Market Index. Our stock portfolios delivered return on investments at least 3.1 times higher than the stock market index over the three one-month trading periods. Conclusion: The objective of this study was to examine whether our stock portfolios would outperform the stock market index over three consecutive time periods. Our results demonstrated that our methodology was reliable and consistent across all 3 time periods, delivering significant profits from trading, further proving that our method was not only theoretically robust but also practically sound.

Stock Analysis, Correlation Analysis, Principal Component Analysis, PCA, Top Stocks, Australian Stock Market, Trading Strategy, Stock Portfolio

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