Statistical Measures of Asset Returns Flashcards
(23 cards)
What are the three main measures of central tendency?
Mean, median, and mode.
What does the mean represent in statistics?
The arithmetic average of a data set.
What is the median?
The middle value in a data set when values are sorted.
Odd: put in ascending order, then the middle value.
Even: “”, then average of the middle two values.
What is the mode?
The value that appears most frequently in a data set.
Unimodal = one value
bimodal = two values that appears more frequently
trimodal = …
What are common measures of dispersion?
Range, variance, standard deviation, and mean absolute deviation (MAD).
What is the range in a data set?
The difference between the highest and lowest values.
What is standard deviation?
A measure of the dispersion of values around the mean.
What does a high standard deviation indicate?
More variability or risk in returns.
Formula of Coefficient of variation
It’s a measure of risk per unit so, st.dev / return
Characteristics of a symetrical distribution
Mean = Median = Mode
What is skewness?
A measure of the asymmetry of a distribution. Created by outliers
What does positive skewness indicate?
A longer right tail; mean > median > mode. A few extremely high values pull the mean to the right. *MEAN IS THE ONLY ONE THAT ACTUALLY MOOVES. More sensible.
What does negative skewness indicate?
A longer left tail; mean < median < mode. A few extremely low values pull the mean to the left. *MEAN IS THE ONLY ONE THAT ACTUALLY MOOVES. More sensible.
What is kurtosis?
A measure of the peakedness or flatness of a distribution.
What is excess kurtosis?
Kurtosis minus 3, used to compare to a normal distribution. (normal distribution = 0 excess kurtosis)
What does positive excess kurtosis imply?
More extreme outliers than a normal distribution (leptokurtic). “Platykurtic” is less than the normal distribution.
What is correlation?
A measure of the strength and direction of a linear relationship between two variables.
What values can correlation coefficients take?
From -1 (perfect negative) to +1 (perfect positive).
What is the implication of a correlation of zero?
No linear relationship between the two variables.
What is spurious correlation
False causal associations made that are either the result of chance or a third variable that could be unkown.
How is the sample mean used in investment analysis?
As an estimate of the expected return.
Why is standard deviation important for portfolio management?
It helps measure total risk of an investment.
How do skewness and kurtosis affect investment decision-making?
They indicate non-normality, affecting risk assessments and model assumptions.
