Context

Assume you work for a trading firm as an analyst. Your manager asks you to analyze the stock price of NVIDIA Corporation (Ticker NYSE: NVDA) and find out the following:

What caused the recent increase in the share price? Is there still potential for the stock price to go up?

In this case, what would you do?

1. Identify Potential Factors - Do some research to find out what factors affected the stock price rise. - Is it the company sales? Is it the company's expanding business? Is the entire sector performing well? Is it the entire stock market going up? - Several factors can affect the stock price increase based on your research and understanding of the company.

Once the factors are identified you can start collecting the data to do the analysis.

2. Collect the Data Once you have done your research and identified the factors that might have led to the price increase of NVDA stock, you can start collecting the data.

3. Relationship between the NVDA's Stock Price and Selected Factors After data is collected you may need a system that would tell you how the stock price of NVDA is influenced by each factor associated. You may not only want to know how are the fluctuations in the stock price but also quantify the fluctuations in the stock price for the changes in the quarterly sales number. You can build a linear regression model to understand this information.

4. Forecasting the future stock price Once you have built a linear model, you can create several scenarios to predict the stock price move with respect to the sales growth numbers. For example, simulate the stock price change given 0.5%, 1%, 1.5%, .... increase in sales number.

Identifying Potential Factors

Assume that after certain research, you were able to find out the following factors that has influenced the NVDA's stock price:

1. NVDA's sales growth
2. Dow Jones Industrial Average Index excess return
3. Advanced Micro Devices (AMD)'s stock excess return
4. Intel's stock excess return
5. Qualcomm's stock excess return
6. NVDA's stock excess return: We are interested in predicting the value for this variable.
7. Excess Return: Excess return is a return of a stock over and above the return of a risk-free rate such as Treasury Bills.

But, Why excess return?

Risk-Adjusted Performance: By investing in the stock market an investor takes additional risk compared to other risk-free assets. Hence, excess return helps the investor understand the risk premium earned for taking additional risk. This makes it a more accurate measure of how well a stock is performing relative to the additional risk taken.

Why competitor company's stock returns?

The stock prices/return of competitor companies can also affect the stock performance of NVDA due to some interconnected factors in the stock market:

- Earnings Report of Competitor Companies: If other companies are doing good in the same industry, it represents strong industry strength, and an investor can expect NVDA good results as the industry is doing good and start buying the shares which will have a positive impact on NVDA's share price. - Sector Trends: Companies within the same sector often move in the same direction due to sector-wise trends. If the competitor companies' share price rises due to some favourable conditions in the sector, NVDA's share price might also benefit due to positive sentiment in the sector.