CHAPTER 3 Statistics and Methods

Statistical concepts and calculations form an important foundation for understanding applied financial methods and formulae. Investment advisors and consultants should have a firm grasp on quantitative concepts in order to analyze historical data, calculate and analyze investment risk and returns, draw accurate conclusions, and make appropriate recommendations to clients. This chapter provides explanations of key elementary statistical concepts.

Understanding and applying familiar concepts like compounding, discount factors, averages, measures of dispersion, and confidence intervals should come easily to investment advisors and consultants. More advanced statistical concepts and calculations however may take additional study to master. In practice, simply understanding the intuition of more advanced concepts and applications like multicollinearity and multivariate regression models is often sufficient. The readings in the chapter explain each concept from a mathematical framework and apply them to common financial and investment challenges to help one better understand and apply each tool in a more meaningful way.

Part I Mathematics and Statistics for Financial Risk Management: Some Basic Math

Learning Objectives

  • Describe the concept of compounding and compute compound returns.
  • Discuss the concept of limited liability.
  • Graph log returns and discuss how logarithms are useful for charting times series that grow exponentially.
  • Explain continuously ...

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