Definition of Cluster analysis:
Cluster analysis is a technique used to group sets of objects that share similar characteristics. It is common in statistics. Investors will use cluster analysis to develop a cluster trading approach that helps them build a diversified portfolio. Stocks that exhibit high correlations in returns fall into one basket, those slightly less correlated in another, and so on, until each stock is placed into a category.
If done correctly, the different clusters will exhibit minimal correlation from one another. This way investors gain all the virtues of diversification: reduced downside losses, capital preservation, and the ability to make riskier trades without adding to the total risk. Diversification remains one of the central tenants of investing and cluster analysis is just one channel to achieving it. .
Statistical classification technique in which cases, data, or objects (events, people, things, etc.) are sub-divided into groups (clusters) such that the items in a cluster are very similar (but not identical) to one another and very different from the items in other clusters. It is a discovery tool that reveals associations, patterns, relationships, and structures in masses of data.
How to use Cluster analysis in a sentence?
- Cluster analysis enables investors to buy and cluster assets with related returns that fit different market segments.
- The cluster analysis revealed useful information in best understanding out target market as it was a complex industry that required detailed analysis.
- They used a cluster analysis to determine that the drug was only effective in males between the ages of 20 and 35.
- One criticism of cluster analysis is that clusters with a high correlation in returns sometimes share similar risk factors, meaning that weak performance in one cluster could translate to weak performance in another.
- Cluster analysis helps investors develop a cluster trading approach that builds a diversified portfolio of investments.
- One of the benefits of cluster analysis is to help protect the investor's portfolio against systemic risks that could make the portfolio vulnerable to losses.
- Our cluster analysis technique was very complex and I needed it explained to me a few times before I understood it.
Meaning of Cluster analysis & Cluster analysis Definition