Handbook of Finance: Valuation, Financial Modeling, and Quantitative Tools

Chapter 58. Elementary Statistics

ROBERT WHALEY, PhD

Valere Blair Potter Professor of Management, The Owen Graduate School of Management, Vanderbilt University

Abstract: A basic understanding of elementary statistics is a prerequisite for asset management, financial management, and risk management. In implementing, the capital asset pricing model, for example, is required for the estimation of three statistical measures: expected return, standard deviation of returns, and covariance of pairs of risk assets is required. In risk management, it is necessary to understand the distribution of asset returns to determine the level of risk exposure of a portfolio or a trading position.

Keywords: Random variable, probability distribution, frequency distribution, variance, standard deviation, covariance, correlation, semivariance, semistandard deviation, semicovariance, semicorrelation, skewness, kurtosis, normal distribution, chi-square distribution, t-distribution, F-distribution, central limit theorem

The purpose of this chapter is to provide a review of elementary statistics. Statistics is used in almost every discipline from aviation to weather prediction. In the field of finance, one of its primary uses is to characterize the rate of return distributions of risky securities or portfolios of securities, although the principles apply to prices changes, earnings, or cash flows of almost any sort.

POPULATION VERSUS SAMPLE

The need for statistics stems from a lack of complete information about ...