QUANTITATIVE METHODS: BASIC CONCEPTS

STATISTICAL CONCEPTS AND MARKET RETURNS

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READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 2

 THE POPULATION AND A SAMPLE
DESCRIPTIVE STATISTICS AND INFERENTIAL STATISTICS

Population is a complete set of items that share at least one property in common
that is the subject of a statistical analysis.

Sample is a subset of the population used to draw inferences about the population.

Descriptive statistics provide simple summaries about the sample and the
measures. Together with simple graphics analysis, they form the basis of virtually
every quantitative analysis of data.

Inferential statistics are used to make probabilistic statements about a population

based on a sample.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 3

 MEASUREMENT SCALES

Scale of measure is a classification that describes the nature of information.

Nominal scale differentiates between items or subjects based only on their names
(BMW, AUDI, Mercedes, …)

Ordinal scale data is put into categories that can be ordered with respect to some
characteristic (the grades are A, B, C, D and F — A being the highest and F, denoting
failure, the lowest).

Interval scale allows for the degree of difference between items, but not the ratio
between them. Ratios are not allowed since 20 °C cannot be said to be "twice as
hot" as 10 °C

Ratio scale possesses a meaningful (unique and non-arbitrary) zero value.

Examples include mass, length, duration, plane angle, energy and electric charge.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 4

 PARAMETER, A SAMPLE STATISTIC, AND A FREQUENCY DISTRIBUTION

A parameter is the characteristics used to describe a population.

A statistic is the characteristics of a sample used to infer information about the

population.

A frequency distribution is a table that displays the frequency of various outcomes

in a sample. Each observation must fall into only one interval or only one group (no
overlapping), and the set of intervals or groups must cover the entire range of
values represented in the data.

Number of M&Ms in a bag

7
6
5
FREQUENCY

4
3
2
1
0
52 53 54 55 56 57 58 59 60
COUNT

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 5

CALCULATE AND INTERPRET RELATIVE FREQUENCIES AND CUMULATIVE RELATIVE
FREQUENCIES, GIVEN A FREQUENCY DISTRIBUTION

Absolute frequency is the actual number of observations in a given interval

Relative frequency is the percentage of total observations falling within an

interval.

Cumulative absolute frequency and cumulative relative frequency are results from
cumulating the absolute and relative frequencies from the first to the last interval
(class)

Absolute Relative Cumulative Absolute Cumulative Relative

Age
Frequency Frequency Frequency Frequency

18-22 6 12% 6 12%

23-27 14 28% 20 40%
28-32 16 32% 36 72%
33-37 11 22% 47 94%
38-42 3 6% 50 100%

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 6

 QUESTION

Calendar data set is an example of:

A) Name scale

B) Interval scale

C) Ratio scale

Interval scale allows for the degree of difference between items, but not the ratio
between them. Ratios are not allowed since January 15 cannot be said to be 3
times January 5.
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 7
 QUESTION

Which of the following statements is correct?

A) Descriptive statistics are used to make probabilistic statements about a

population based on a sample.

B) Noun, verb, preposition, pronoun, etc are examples of nominal scale.

C) Sample is a complete set of items that share at least one property in common
that is the subject of a statistical analysis.

Nominal scale differentiates between items or subjects based only on their names.
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 8
 QUESTION

Which of the following is an example of a parameter?

A) Sample 4th central moment.

B) Sample 3rd central moment.

C) Population 4th central moment.

A parameter is the characteristics used to describe a population.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 9
 QUESTION

Which of the following statements about frequency distribution is correct?

A) Classes must be mutually exclusive.

B) Frequency distributions doesn’t work with Nominal scales.

C) All classes must cover at least 70% of the range of values represented in the data

Intervals (classes) must be mutually exclusive.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 10
 QUESTION

CAR BRAND FREQUENCY

BMW 117
AUDI 123
LADA 161

What is the relative frequency of LADA class?

A) 401

B) 161

C) 40.15%

161/ (117+123+161) ~ 0.4015

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 11
 QUESTION
INTERVAL FREQUENCY CUMULATIVE FREQUENCE
0%-25% 10 X
25%-50% Y 26
50%-75% Z 29
75%-100% 15 A

What is the product of X, Y and Z ?

A) 44

B) 480

C) 300

10 * 16 * 3 = 480
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 12
 A HISTOGRAM AND A FREQUENCY POLYGON
A histogram is used to graphically represent the data contained in frequency
distribution. To construct a histogram, the intervals are listed on the horizontal axis,
while the frequencies are scaled on the vertical axis.

A frequency polygon plots the midpoint of each interval on the horizontal axis and
the absolute frequency for that interval on the vertical axis, and connects the
midpoints with straight lines. The advantage of histograms and frequency polygons
is that we can quickly see where most of the observations lie.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 13

 CENTRAL TENDENCY (THE POPULATION MEAN, SAMPLE MEAN, ARITHMETIC MEAN,
WEIGHTED AVERAGE OR MEAN, GEOMETRIC MEAN, HARMONIC MEAN, MEDIAN, AND MODE)

In statistics, a central tendency (or, more commonly, a measure of central

tendency) is a central or typical value for a probability distribution. The most
common measures of central tendency are the arithmetic mean, the median and
the mode.

The arithmetic mean is the most frequently used measure of central tendency. It is
simply the average of all the observations. The arithmetic mean can be calculated
for the entire population (μ) and for a sample (X).

𝑛 𝑛
𝑖=1 𝑋𝑖 𝑖=1 𝑋𝑖
μ= 𝑋=
𝑛 𝑛

Weighted mean – an arithmetic mean that incorporates weighting to certain data

elements.
𝑛

𝑋𝜔 = 𝜔𝑖 𝑋𝑖
𝑖=1
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 14
 CENTRAL TENDENCY (THE POPULATION MEAN, SAMPLE MEAN, ARITHMETIC MEAN,
WEIGHTED AVERAGE OR MEAN, GEOMETRIC MEAN, HARMONIC MEAN, MEDIAN, AND MODE)

EQUAL WEIGHTS
THE ARITHMETIC MEAN
𝑛 𝑛
𝑖=1 𝑋𝑖 𝑖=1 𝑋𝑖
μ= 𝑋=
𝑛 𝑛

CENTER OF MASS
DIFFERENT WEIGHTS

WEIGHTED MEAN
𝑛

𝑋𝜔 = 𝜔𝑖 𝑋𝑖
𝑖=1

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 15

 CENTRAL TENDENCY (THE POPULATION MEAN, SAMPLE MEAN, ARITHMETIC MEAN,
WEIGHTED AVERAGE OR MEAN, GEOMETRIC MEAN, HARMONIC MEAN, MEDIAN, AND MODE)

Median – the middle value that separates the higher half from the lower half of the
data set. The median and the mode can be used for ordinal data, in which values
are ranked relative to each other but are not measured absolutely. Median is not
sensitive to extreme values and is most useful when dealing with skewed
distributions. However, the median does not use all information about the size and
magnitude of observations and only focuses on their relative positions.

For a data set with odd number of observation the median is the value of the item
𝑁+1
in [ ] position.
2

For a data set with even number of observation the median is the average of items
𝑁 𝑁+2
occupying positions [ ] and [ ].
2 2

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 16

 CENTRAL TENDENCY (THE POPULATION MEAN, SAMPLE MEAN, ARITHMETIC MEAN,
WEIGHTED AVERAGE OR MEAN, GEOMETRIC MEAN, HARMONIC MEAN, MEDIAN, AND MODE)

Mode – the most frequent value in the data set. This is the only central tendency
measure that can be used with nominal data, which have purely qualitative
category assignments.

A data set that has one mode is said to be unimodal, while one that has two modes
is said to be bimodal. It is also possible for a data set to have no mode, where all
values are different and no value occurs more frequently than others. For grouped
data, the modal interval is the interval with the highest frequency.

The mode is the only measure of central tendency that can be used with nominal
data.
BIMODAL
Number of M&Ms in a bag
7
6
FREQUENCY

5
4
3
2
1
0
52 53 54 55 56 57 58 59 60
COUNT
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 17
 CENTRAL TENDENCY (THE POPULATION MEAN, SAMPLE MEAN, ARITHMETIC MEAN,
WEIGHTED AVERAGE OR MEAN, GEOMETRIC MEAN, HARMONIC MEAN, MEDIAN, AND MODE)

Geometric mean – the nth root of the product of the data values, where there are n of
these. This measure is valid only for data that are measured absolutely on a strictly positive
scale.
𝑛
𝐺= 𝑋1 𝑋2 … 𝑋𝑛

Weighted mean – an arithmetic mean that incorporates weighting to certain data elements.
𝑛

𝑋𝜔 = 𝜔𝑖 𝑋𝑖
𝑖=1

The harmonic mean can be used to find an average price of financial instrument for equal
periodic investments.
𝑛
𝑋𝐻 =
𝑛 1
𝑖=1 𝑋
𝑖

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 18

 CENTRAL TENDENCY (THE POPULATION MEAN, SAMPLE MEAN, ARITHMETIC MEAN,
WEIGHTED AVERAGE OR MEAN, GEOMETRIC MEAN, HARMONIC MEAN, MEDIAN, AND MODE)

Arithmetic mean
• All observations are used in the computation of the arithmetic mean.
• The sum of the deviations from the arithmetic mean is always 0.
• Arithmetic mean is sensitive to extreme values
• An arithmetic mean is unique i.e., a data set only has one arithmetic mean.

Geometric mean
• It is always less than, or equal to the arithmetic mean.
• It equals the arithmetic mean only when all the observations are identical.
• The difference between the geometric and arithmetic mean increases as the
dispersion in observed values increases.

Harmonic mean
• It is always less than, or equal the geometric mean.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 19

 CALCULATION AND INTERPRETATION OF
QUARTILES, QUINTILES, DECILES, AND PERCENTILES

A quantile is a value at, or below which a stated proportion of the observations in a

data set lie.

Percentiles divide the distribution into hundredths.

Deciles divide the data into tenths.
Quintiles divide the distribution into fifths.
Quartiles divide the distribution in quarters or four equal parts.

For example the formula for the position of the i-th decile in a data set with n
observations sorted in ascending order is:

𝑛+1 𝑖
𝐿𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑑𝑒𝑐𝑖𝑙𝑒 =
10

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 20

 QUESTION

Which of the following statements is correct?

A) A histogram and a frequency polygon both plot the absolute frequency on the
horizontal axis.

B) A frequency polygon is constructed by plotting the midpoint of each interval on

the vertical axis.

C) A histogram is a bar chart of data that has been grouped into a frequency
distribution.

A frequency polygon plots the midpoint of each interval on the horizontal axis and
the absolute frequency for that interval on the vertical axis, and connects the
midpoints with straight lines.
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 21
 QUESTION

In a frequency distribution histogram, the frequency of an interval (class) is given by

the:

A) height of corresponding bar multiplied by the width of the corresponding bar.

B) width of the corresponding bar.

C) height of the corresponding bar.

The frequency of the particular class is given by the value on the vertical axis, or the
height of the corresponding bar.
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 22
 QUESTION

The most recent 5 years prices of the stock are

$120; $110; $34; $73; $109.

Which of the following statements isn’t correct?

A) harmonic mean is $71.73

B) geometric mean is $81.39

C) arithmetic mean is $69.20

AM ≥ GM ≥ HM
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 23
 QUESTION

Over the last 4 years, the portfolio's annual returns were: -6%, -3%, 0%, 11%
The geometric mean is

A) 0.0%

B) 0.5%

C) 0.3%

4
GM = 1 + −0.06 1 + −0.03 1 + 0 1 + 0.11 − 1 = 0.3%
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 24
 QUESTION

What is the 2nd quartile of the following data?

0 11 45 55 57 99 101 131

A) 56

B) 4.5

C) 55

8+1 2
𝑃𝑜𝑠𝑖𝑡𝑖𝑜𝑛 = = 4.5
4
55 + (57 – 55)0.5 = 56
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 25
 QUESTION

What is the 3rd quintile of the following data?

13 14 19 23 45 46 47 99 101 131

A) 46.6

B) 6.6

C) 46

10+1 3
𝑃𝑜𝑠𝑖𝑡𝑖𝑜𝑛 = = 6.6
5
46 + (47 – 46)0.6 = 46.6
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 26
A RANGE AND A MEAN ABSOLUTE DEVIATION AND THE VARIANCE AND STANDARD
DEVIATION OF A POPULATION AND OF A SAMPLE

The range is the difference between the highest and lowest values in a data set.
Range = Max. value − Min. value

MAD is the average of the absolute values of deviations of observations in a data

set from its mean.
𝑛
𝑖=1 |𝑋𝑖 − 𝑋 |
𝑀𝐴𝐷 =
𝑛

Variance is a measurement of the spread between numbers in a data set. The

variance measures how far each number in the set is from the mean.

𝑛
𝑖=1(𝑋𝑖 −𝜇)2
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = (𝑝𝑜𝑝𝑢𝑙. 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛)2 = σ2 =
𝑛
𝑛
−𝑋)2
𝑖=1(𝑋𝑖
𝑆𝑎𝑚𝑝𝑙𝑒 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = (𝑠𝑎𝑚𝑝𝑙𝑒 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛)2 = 𝑠2 =
𝑛 −1

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 27

 THE PROPORTION OF OBSERVATIONS FALLING WITHIN A SPECIFIED NUMBER OF
STANDARD DEVIATIONS OF THE MEAN USING CHEBYSHEV’S INEQUALITY

Chebyshevs inequality states:

for any distribution the proportion of the observations within k (for k > 1) standard
1
deviations of the mean is at least (1 − 2).
𝑘

For any distribution at least 75% of observations lie within ± 2 SD of the mean.
For normal distribution 96% of observations lie within ± 2 SD of the mean.

For any distribution at least 89% of observations lie within ± 3 SD of the mean.
For normal distribution more than 99% of observations lie within ± 3 SD of the
mean.

NORMAL
DISTRIBUTION

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 28

THE PROPORTION OF OBSERVATIONS FALLING WITHIN A SPECIFIED NUMBER OF
STANDARD DEVIATIONS OF THE MEAN USING CHEBYSHEV’S INEQUALITY

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 29

 THE COEFFICIENT OF VARIATION AND THE SHARPE RATIO

Coefficient of variation is the ratio of the standard deviation to the mean

𝑠
𝑪𝒐𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒕 𝒐𝒇 𝒗𝒂𝒓𝒊𝒂𝒕𝒊𝒐𝒏 = 𝐶𝑉 =
𝑋

The Sharpe ratio measures excess return per unit of risk:

(𝒓𝒆𝒕𝒖𝒓𝒏𝒑 − 𝒓𝒊𝒔𝒌 𝒇𝒓𝒆𝒆 𝒓𝒂𝒕𝒆)

𝑺𝒉𝒂𝒓𝒑𝒆 𝒓𝒂𝒕𝒊𝒐 =
𝝈𝒑

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 30

 QUESTION

Find the mean absolute deviation (MAD) and sample standard deviation
of a series of stock price?
37 41 40 48 52 39 41 46
MAD Sample SD

A) 4.25 5.13

B) 0 4.8

C) 4.25 4.8

37 + 41 + 40 + … + 46
𝑋= = 43
8
𝑛
𝑖=1 |𝑋𝑖 − 𝑋 | 37 − 43 + 41 − 43 + … + |46 − 43|
𝑀𝐴𝐷 = = = 4.25
𝑛 8
𝑛
−𝑋)2
𝑖=1(𝑋𝑖 (37 − 43)2 +(41 − 43)2 + … + (46 − 43)2
𝑠= = = 5.13
𝑛 −1 8 −1
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 31
 QUESTION

Find the population standard deviation of a series of the stock return?

4% 4% 4%

A) 0.0

B) 4.0

C) 2.0

𝑇ℎ𝑒𝑟𝑒 𝑖𝑠 𝑛𝑜 𝑎𝑛𝑦 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 32
 QUESTION

According to Chebyshev's Inequality, what is the minimum percentage of

observations that will lie within 5 standard deviations of the mean?

A) 96.0%

B) 95.0%

C) > 99.0%

1 1
(1 − 2 ) =(1 − 2 ) = 96%
𝑘 5
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 33
 QUESTION

Sample of taxi fares in Russia is positively skewed. What’s the minimum percentage
of observations lies within plus or minus 1.5 standard deviations of the mean?

A) 68.0%

B) 55.5%

C) 33.3%

1 1
(1 − 2 ) =(1 − ) = 55.5%
𝑘 1.52
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 34
 QUESTION

Which of the following statement is correct?

Mean Return Standard Deviation

Stock A 5% 8%
Stock B 6% 9%
Stock C 7% 10%

A) Stock A is the riskiest

B) The coefficient of variation of stock B is 0.667

C) Stock C is riskier than Stock B

8 9 10
𝐶𝑉𝐴 = = 1.6; 𝐶𝑉𝐵 = = 1.5; 𝐶𝑉𝐶 = ~1.43
5 6 7
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 35
 QUESTION

Calculate the Sharpe ratio for a portfolio with a mean return of 6% and standard
deviation of 8% given that the risk‐free rate is 2%.

A) 0.5

B) 2.0

C) 0.75

(𝑟𝑒𝑡𝑢𝑟𝑛𝑝 − 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒) (6% − 2%)

The Sharpe ratio = = = 0.5
σ𝑝 8%
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 36
 SKEWNESS
A POSITIVELY AND NEGATIVELY SKEWED RETURN DISTRIBUTIONS

Skewness is a measure of the asymmetry of the probability distribution of random

variable about its mean.

A right-skewed distribution has positive skewness.

A left-skewed distribution has negative skewness.

Sample skew with an absolute value greater than 0.5 is considered significantly
different from zero.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 37

 RELATIVE LOCATIONS OF THE MEAN, MEDIAN, AND MODE
FOR A UNIMODAL, NONSYMMETRICAL DISTRIBUTION

Negatively - Skewed: Mean < median < mode

Positively - Skewed: Mean > median > mode
Symmetric: Mean = median = mode

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 38

 SAMPLE SKEWNESS AND KURTOSIS;

Kurtosis measures the extent to which a distribution is more or less peaked than a
normal distribution. A normal distribution has a kurtosis of 3. Excess kurtosis with
an absolute value greater than 1 is considered significant.

Leptokurtic: More peaked than normal;

Fat tails; excess kurtosis > 0

Platykurtic: Less peaked than normal;

Flatter than a normal; thin tails;
excess kurtosis < 0

Mesokurtic:
Excess kurtosis = 0

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 39

 THE USE OF ARITHMETIC AND GEOMETRIC MEANS
IN INVESTMENT RETURN ANALYSIS.

AM isn’t a good tool for performance presentation

(50% loss one year and 50% gain next year is a good example).

AM return is appropriate for forecasting single period returns in future periods,

while the GM is appropriate for forecasting future compound returns over multiple
periods.

𝑥+𝑦
AM ( ) always bigger than GM ( 𝑥𝑦 ).
2

𝑥+𝑦
≥ 𝑥𝑦
2

x + y ≥ 2 𝑥𝑦

(𝑥 + 𝑦)2 ≥ 4𝑥𝑦

(𝑥 − 𝑦)2 ≥ 0

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 40

 QUESTION

Which of the following statement isn’t correct?

A) Sample skew with an absolute value greater than 0.5 is considered significantly
different from zero.

B) For skewed distribution the magnitude of positive deviations from the mean is
different from the magnitude of negative deviations from the mean.

C) For skewed distribution mean=mode=median

In asymmetrical distributions the mean, 𝑡ℎ𝑒 median 𝑎𝑛𝑑 𝑡ℎ𝑒 𝑚𝑜𝑑𝑒

are not the same
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 41
 QUESTION

Which of the following statement isn’t correct?

A) A distribution that is not symmetrical has excess skew equals 3.

B) A Insurance buyer can have a positively skewed distribution.

C) Symmetrical distribution has zero skewness .

Sample skew with an absolute value greater than 0.5 is considered significantly
different from zero.
READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 42
 QUESTION

Which of the following statement about skewed distribution isn’t correct?

A) median > mode > mean.

B) mode > median > mean

C) Mean > median > mode.

Median is always between mode and mean

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 43
 QUESTION

Which of the following statement about positively-skewed distribution is correct?

A) mean > median > mode.

B) mode > median > mean

C) mean > median < mode.

Positively - Skewed: Mean > median > mode

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 44
 QUESTION

Which of the following statements about kurtosis isn’t correct?

A) Kurtosis is 4th central moment.

B) Kurtosis is a measure of the heaviness of the tail of the distribution.

C) Negative excess kurtosis is called leptokurtic.

Negative excess kurtosis is called platykurtic.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 45
 QUESTION

Which of the following statements concerning a mesokurtic distribution with zero

skewness is correct?

A) The mode will be greater than the median.

B) It has a lower percentage of small deviations from the mean than a normal
distribution.

C) It has zero excess kurtosis.

Mesokurtic distribution has zero excess kurtosis.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 46
 QUESTION

Investment has produced annual returns of -2%, 0%, 2%, and 4%. The most
appropriate estimate of the next year’s return, based on these historical returns, is
the:

A) arithmetic mean.

B) geometric mean.

C) quadratic mean.

AM return is appropriate for forecasting single period returns in future periods

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 47
 QUESTION

Given the portfolio performance for the past 5 years the GM is:

A) best estimator of the compound annual rate of return over multiple periods.

B) best estimator of the next year’s performance.

C) upward biased estimator

GM is appropriate for forecasting future compound returns over multiple periods.

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 48
 HOMEWORK ASSIGNMENT
READING
CFA® Level I Curriculum (2019) Volume I  Reading 8

PRACTICE PROBLEMS
CFA® Level I Curriculum (2019) Volume I  Reading 8  PRACTICE PROBLEMS
MOODLE  CFA® Level I 2019  TESTS  QM #2

READING 8 STATISTICAL CONCEPTS AND MARKET RETURNS 49