Which are the common statistical terms used in Investing?
This article gives a brief overview of basic statistical terms used in investing in stocks and mutual funds.
This article gives a brief overview of basic statistical terms used in investing in stocks and mutual funds.
Please use the Find feature of your browser to look for specific items of interest.
Average = (Sum of all values) / (Number of values)
The average, or mean, is a measure of central tendency that gives an idea of the central value of a dataset. In investing, it helps to understand the typical return over a period.
If the monthly returns of a mutual fund over three months are 2%, 3%, and 5%, the average return is (2% + 3% + 5%) / 3 = 3.33%.
Median = Middle value of a dataset when arranged in ascending or descending order
The median is the middle value of a dataset and is used to understand the central tendency without being affected by outliers. In investing, it can show the typical return in a way that is not skewed by extreme values. Median is best suited in data sets where mean is not sutiable.
For the returns 1%, 3%, 5%, 7%, and 9%, the median is 5%, as it is the middle value.
Standard Deviation = sqrt[(Σ(xi - μ)²) / N]
Standard deviation measures the dispersion or variability of a dataset relative to its mean. In investing, it is used to gauge the risk or volatility of a stock or mutual fund.
If a mutual fund has monthly returns of 1%, 3%, 5%, 7%, and 9%, the standard deviation can show how much these returns deviate from the average, indicating the risk.
Sharpe Ratio = (Rp - Rf) / σp
The Sharpe Ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk (measured by standard deviation). It helps to understand the return of an investment relative to its risk.
If a mutual fund has a return of 10%, a risk-free rate of 4%, and a standard deviation of 5%, the Sharpe Ratio is (10% - 4%) / 5% = 1.2.
Treynor Ratio = (Rp - Rf) / βp
The Treynor Ratio measures returns earned in excess of that which could have been earned on a risk-free investment, per each unit of market risk. It is similar to the Sharpe Ratio but uses beta as the risk measure.
If a mutual fund has a return of 12%, a risk-free rate of 5%, and a beta of 1.5, the Treynor Ratio is (12% - 5%) / 1.5 = 4.67.
Alpha = Rp - [Rf + βp (Rm - Rf)]
Alpha measures the performance of an investment relative to a market index. A positive alpha indicates that the investment has outperformed the market after adjusting for risk.
If a mutual fund has a return of 15%, the market return is 10%, the risk-free rate is 4%, and the beta is 1.2, the alpha is 15% - [4% + 1.2*(10% - 4%)] = 3.8%.
Information Ratio = (Rp - Rb) / σ(Rp - Rb)
The Information Ratio measures the returns of an investment above the returns of a benchmark, relative to the volatility of those returns. It helps to assess the consistency of an investment’s performance.
If a mutual fund has a return of 14%, the benchmark return is 10%, and the tracking error (standard deviation of the difference) is 2%, the Information Ratio is (14% - 10%) / 2% = 2.
This article provides multiple options for grandparents to transfer family wealth to their grandchildren.
Published: 7 July 2024
13 MIN READ
This article introduces the concept of the information ratio, which mutual funds may need to declare daily for their funds.
Published: 9 July 2024
4 MIN READ
This article analyses the changes in Budget 2024 that impact investors investing abroad under the RBI’s Liberalised Remittance Scheme.
Published: 8 September 2024
4 MIN READ
This article analyses the portfolio of the Franklin India Ultra Short Duration Fund to see if there any potential red flags similar to what led to the closure of six Franklin debt funds in April 2020.
Published: 6 September 2024
5 MIN READ
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled Which are the common statistical terms used in Investing? first appeared on 08 Jul 2024 at https://arthgyaan.com