Statistics In Finance

Question 1

How do you calculate returns?

Answer 1

Rt=(Pt-(Pt-1)+Dt)/Pt-1

Roct=(Poct-(Psept)+0)/Psept

Question 2

How do you calculate the mean return (Expected Return E[R])?

Answer 2

E(Ri)=1/T E Ri,t

Question 3

What is the equation to calculate the dispersion around the mean?

Answer 3

VAR(Ri)=1/(T-1)*(return (Rt)-expected return E(Ri))^2 [Do for each returns & then times by the 1/(T-1)

Question 4

How do you calculate the standard deviation (STD), also used as a dispersion measure?

Answer 4

STD(Ri)=Square root of the VAR(Ri)

Question 5

What is Covariance?

Answer 5

When dealing with two random variables (two investments) we are interested in the mean, variance & whether they share any relationship.

Question 6

How do you calculate covariance?

Answer 6

Using the COV equation

Question 7

What is Correlation and how do you calculate it?

Answer 7

a standardised measure of covariance, it will range between +1 and -1, it is calculated using the CORREL equation

Question 8

How do you calculate the variance without covariance?

Answer 8

Correl(A,B)=Cov(a,b)/STDa*STDb,

therefore Cov = Correl(a,b)STDaSTDb