Quantative Methods Flashcards
Nominal risk free rate approx
Real risk free rate + expected inflation rate
Types of risks affecting securities (3)?
1) Default risk
2) Liquidity risk
3) Maturity risk
Real interest rate
Interest rate before taking inflation into account
Holding period return
Percentage increase in value of investment over that period
Internal rate of return (IRR)
Interest rate at which a series of cash inflows and outflows sum to zero when discounted to present value. (E.g. NPV of zero)
Money weighted rate of return
IRR on a portfolio
Winsorised mean
Substitute % of extreme values for those at the boundary at the %
Properties of central limit theorem (3)
- If n>=30 distribution of sample means is normal
- Mean of population = mean of sample means
- Variance of sample = variance of population/ sample size n
Type 1 and type 2 error hypothesis testing
Type 1: H0 true and we reject
Type 2: H0 false and we don’t reject
Hypothesis testing for dependant and independent samples.
Independent: Test differences between means
Dependant: Test significance of the mean of the differences between paired sample s