Chapter One Flashcards
What is data mining?
Sorting through large amounts of information looking for anything that is relevant.
What is more risky - interpolation or extrapolation?
Interpolation is less risky than extrapolation
Does strong correlation prove cause and effect?
No it does not
When is least squares regression applicable?
Only to linear relationships
What is plotted on y-axis?
Dependent variable
What is b?
The slope
How are regression coefficients calculated?
Using the least squares method
In a positively skewed distribution, what holds true?
Mean > median > mode
What is mean a measure of?
Location
Is the IQR affected by extremes?
No it is unaffected by extremes
Is the range a fuction of extremes?
Yes
If the plot of two variables X and Y results in a horizontal line, this tells us?
They have zero correlation as the value of the y variables is independent from the value of the x variable, it does not change regardless of the value of x
Why will interpolated results from a line of best fit not be accurate?
Since the line of best fit may not be very accurate
Why does regression analysis not highlight spurious relationships between two variables?
It does not in itself prove causality
With a positively skewed distribution…
The mean is most distorted by extreme values
Dividing the variance by the standard deviation for a sample would give
Standard deviation, as the variance is standard deviation squared
Describe R-squared
- R-squared expresses the goodness of fit of a regression model
- It’s the correlation coefficient squared so is on a scale of 0 to 1
Describe correlation coefficient
- The correlation coefficient is on a scale of -1 to 1
- The correlation coefficient does show strength; the closer to +/-1 the closer the individual observations are to the line of best fit
What does CNX Nifty represent?
The performance of the largest 50 stocks in India
What would be appropriate as a benchmark for a broadly based portfolio of UK and US shares?
The respective broad-based equity indices of both markets: S&P 500 and FTSE All Share
A disadvantage of the geometric index
It cannot be used as a meaningful benchmark as, through its mathematical construction, it cannot fairly reflect achievable portfolio returns
Name 3 value-weighted indices
- S&P 500
- FTSE 100
- FTSE All Share
Is Nikkei 225 value-weighted?
No, it is a price-weighted index as it is not weighted by market cap. Therefore, each security contributes an equal share towards the index value
What is a price-weighted index also referred to as?
An equally weighted index
How is DAX calculated?
It is arithmetically calculated and weighted by market cap
How is Nikkei 225 Index calculated?
It is arithmetically calculated however it is equally weighted as each share contributes an equal share
Which FTSE index is price-weighted?
The FT ordinary is made up of 30 UK shares representing the breadth of UK industry. Size is not the primary consideration, although companies are also in the FTSE 100.
UK indices weighted by market cap
- FTSE all share
- FTSE 100
- FTSE 250
The majority of worldwide indices that are used for performance measurement are described as
Value-weighted by market cap, more specifically using the free float, artihmetically calculated
Give three equally weighted indices
- Dow Jones
- FTSE ordinary
- Nikkei 225
Describe the FT ordinary index
It is equally weighted, but geometrically calculated
What is the name of indices designed to reflect price movements in the bond markets?
FTSE Actuaries UK Gilts Indices and comprise various indives covering the market for conventional UK Government bonds and also index-linked securities
How are UK Government indices divided?
By maturity categories:
1. Up to 5 years
2. 5 to 10 years
3. 5 to 15 years
4. 10 to 15 years
5. Over 15 years
Are geometric indices less sensitive to large changes in constituent prices?
Yes
Will geometric indices always underestimate the performance of the constituents?
Yes
Are geometric indices the preferred method of index construction?
No, very few are calculated using the geometric construction method, the only exception is the FT 30
Are individual firms or investors able to affect the price of funds?
No
Which projects should be accepted by an investor?
Only projects generating positive NPV
What does NPV assume?
That any surplus funds can be reinvested at the same rate of return as the required rate of return
Is autocorrelation a characterstic of the normal distribution?
No it is not, autocorrelation suggests that returns from one period are in some way connected to those of another but is unrelated to normal distributions
What is snowball sampling?
A technique that is applied when investigating a characteristic that is quite rare or is hidden within the population, characteristics that make it both difficult and costly to located items with such characteristics
When will NPV and IRR provide the same conclusion of the viability of investments?
Where capital is freely available and investment opportunities only have a single IRR
What does IRR disregard?
The scale of any investment opportunity
What investment cannot have multiple IRRs?
A simple investment that, once bought, only provides positive returns
