Introduction to Statistics Flashcards
How is a return on an asset calculated between t and t+1?
Return = (Payoff at t+1)/(Cost at t)
What are the two components of a stock’s return?
Capital gains/losses
Income (e.g. dividends)
What is the formula for stock returns with dividends?
(Pₜ₊₁ + Dₜ₊₁) / Pₜ
P = price
D= Dividend payment
How to calculate compounded return (geometric mean return)?
(FV/Initial Value)^(1/T) - 1
If an investor has a very long horizon they should?
Select the investment with the highest geometric return (see Levy(2022))
What are the common summary statistics used in finance?
Mean
Standard deviation
Minimum
Maximum
What drives equity return in the long run?
Dividends
What drives equity return in the short run?
Capital gains/losses
How to calculate real returns?
Real return =
(1+nominal return)/
(1+inflation rate)-1
Why is adjusting for inflation important when analyzing market index and Treasury Bill returns?
Because inflation has a major impact on their performance, affecting the real value of returns.
What asset is considered the best hedge against inflation?
Gold. It also performs well in times of crisis e.g. COVID-19 pandemic
When do bonds perform best?
DMS(2012) finds bonds perform best in times of deflation and outperform equity.
Infrastructure assets
E.g. Telecommunication towers. Perform relatively well in times of high inflation.
What is the equity premium
An equity risk premium is an excess return that investing in the stock market provides over a risk-free rate
Why is the equity premium important?
It is used in estimating cost of equity capital and discount rates in investment appraisal.
t-statistic value
A large value of |t|, more likely to reject null.
If |t| > 1.96, can reject the null at the 5% significance level
If |t| > 1.64, can reject the null at the 10% significance level
p value
The probability of the observed test statistic.
If p value < 0.05, can reject the null at the 5% level.
If p value < 0.1, can reject the null at the 10% level
