Selection of stocks using discriminant analysis.

Discriminant Analysis is a statistical technique used to reduce the differences between variables in order to classify them into a set number of broad groups

In finance, this technique is used to compress the variance between securities while also allowing the person to screen for several variables. It is related to discriminant analysis, which, in simplified terms, tries to classify a data set by setting a rule (or selecting a value) that will provide the most meaningful separation

Although this technique requires a fair bit of mathematics, it is relatively simple. Discriminant Analysis allows an analyst to take a pool of stocks and focus on the data points that are most important to a specific type of analysis, shrinking down the other differences between the stocks without totally factoring them .

Discriminant Analysis helps investors, individual and institutional, in their decission making process especially in underdeveloped capital markets.
Normally a cross-sectional relation  between the independent variables of the model, comprised of beta coefficient and some fundamental variables as well as the average stock returns on the capital market is taken into account. Discriminant Analysis is a useful quantitative tool that can help investors in shaping their investment strategies including diverifying their portfolios to maximise returns and reduce market risks.