Chapter 12 - Understanding investment data

Question 1

populations

samples

parameters

Answer 1

• populations - all members of a specified group
• samples - subset of the population that provides info on the population
• parameters - used to describe a charetristic of a population. for example, an average or percentage

Question 2

normal distribution

Answer 2

• commanuly used for asset returns
• 68.3% of observations lie between 1 standard deviation
• 95.5% of observations lie between 2 standard devations
• 99.75% of observations lie between 3 standard devations

Question 3

linear regression

Answer 3

• measure of the linear relationshio between two variables - regression looks at the relationship between a dependent variable and one or more independent variables
• if a linear relationship can be established, predection of one variable can be made when the other is known

Question 4

correlation

r = 1

r= 0

r= -1

Answer 4

measures the linear relationship between two variables

r=1 - returns move together realtive to their mean returns

r= 0 - there is no linear relationship bnetween the variables

r=-1 - returns move in the opposite direction relative to their mean returns

Question 5

frequency distributions

Answer 5

• grouping of data into a number of non-overlapping classes or intervals. the number of each internval can then be counted and the data can be analysed
• the number of observations in each interval is called the absolute frequency
• the relative frequency is the percentage of the total observations falling into the interval

Question 6

graphs and absolute frequency

Answer 6

• histogram is a bar chart showing the absolute frequency on the vertical axis and the intervals on the horizontal axis
• frequency polygons is a trend line showing the absolute freqency on the vertical axis and and the interval midpoints on the horizontal axis

Question 7

sampling methods

sampling bias

Answer 7

methods

• simple random sample
• systematic random sampling - every nth item
• stratified random sampling - divide the population into subgroups (strata) and select a sample from each group

sampling bias

• data-mining bias - models are derived from searching through historic data for patterns or trading rules
• selection bias - data is excluded from the analysis, possibly because it was not available
• look-ahead bias - when a test uses information that was not available at the test date
• survivorship bias - occurs when companies have gone bankrupt, or funds or portfolios that have not been liquidated, are not included in the analysis

other biases

• time-period bias - the test period does not match the conclusion drawn
• data-snooping bias - results of other analysts research are used, or the focus is on patterns that may have been identified by other researchers

Question 8

geometric mean and arithmetic mean

Answer 8

geometric mean - most suitable for calculating average historic returns, since it compounds the returns and represents what an investor would actually have achieved

arithmetic mean - is often used for projecting future returns since it better predicts the future portfolio value