1. Statistics

Question 0

What are the main measures of dispersion?

Answer 0

The range, variance and standard deviation

Question 1

What are the main measures of central tendency?

Answer 1

Mean, median and mode

Question 2

What is dispersion?

Answer 2

The extent to which values within the distribution are spread around, or deviate from, a single number (found through the mean, median or mode)

Question 3

What is the mean?

Answer 3

The average value of all the date

Question 4

What is the median?

Answer 4

The middle item that has exactly half the data above it and half below it

Question 5

What is the mode?

Answer 5

The most common number that occurs

Question 6

what is the most commonly used measure of central tendency and what is its main drawback?

Answer 6

The mean

It takes into account extremes of data which influence the result

Question 7

What measure of central tendency would be used for data which had extreme outliers?

Answer 7

The median

Question 8

When would it be useful to use the geometric mean?

Answer 8

When looking at compound changes such as portfolio returns

Question 9

What is the range?

Answer 9

The simplest measure of dispersion - the difference between the highest and the lowest values in a set of data

Question 10

What is the main drawback of using range as a measure of dispersion?

Answer 10

It is distorted by extreme values and ignores the numbers in between

Question 11

What is the variance?

Answer 11

The variance measures the spread of data to determine the dispersion of data around the arithmetic mean

Question 12

What is the main advantage and the main disadvantage of variance?

Answer 12

It provides a measure of dispersion and is used to calculate the beta of a stock

It results in a value in different units than the original

Question 13

How do you work out the standard deviation from the variance?

Answer 13

Standard deviation is the square root of the variance

It is the most commonly used measure of dispersion

Question 14

Using standard deviation, what does the resultant frequency curve look like on a graph?

Answer 14

A bell shaped curve

Question 15

What is it called when data does not conform to a normal pattern?

Answer 15

Skewed data

Question 16

If the peak of the data is tot he left of centre how’s is the data viewed?

Answer 16

Positively skewed

Question 17

If the peak of the data is to the right of centre how is the data viewed?

Answer 17

Negatively skewed

Question 18

What is kurtosis?

Answer 18

When equity markets produce more extreme positive and negative returns than should statistically be the case.

Question 19

What is the inter-quartile range?

Answer 19

The inter-quartile range ranks data such as comparable performance returns from funds against each other, presents the data as a series of quartiles, and then measures the difference between the lowest rank quartile to the highest.

Question 20

What is diversification?

Answer 20

The reduction in risk for a given level of expected return

Question 21

What are the two ways of quantifying the diversification potential of combining securities when constructing a portfolio?

Answer 21

Correlation

Covariance

Question 22

Each asset class is differentiated by three factors that characterise its investment performance. What are these?

Answer 22

1. The historic level of return that the asset class has delivered
2. The historic level of risk that the asset class has experienced
3. The level of correlation between the investment performance of each asset class

Question 23

What is correlation?

Answer 23

Correlation measures how the returns from two different assets move together over time and is scaled between +1 and -1

Question 24

How do assets with a high level of correlation (close to +1) tend to move?

Answer 24

In the same direction as each other

Question 25

How do assets with a low of correlation (close to 0) tend to move?

Answer 25

These would move independently of each other

Question 26

How do assets with a negative correlation (less and 0) tend to move?

Answer 26

An increase in one share price is associated with a decrease in another.

Assets with strong negative correlations (close to -1) tend to move in opposite directions

Question 27

What is a perfect correlation?

Answer 27

Where the change in the price of one share is exactly matched by an equal change in another.

Question 28

What is covariance?

Answer 28

A statistical measure of the relationship between two variables such as share prices.

Question 29

How is the covariance calculated?

Answer 29

By multiplying the standard deviation of the first share by the standard deviation of the second share and then by the correlation coefficient.

A positive covariance between the returns of the two shares shows they have moved in the same direction, while a negative covariance means they have moved inversely. The larger the covariance, the greater the historic joint movements of the two securities in the same direction.