7. FIN 301-F09 Lab 7 Correlation and Regression Analysis

7. FIN 301-F09 Lab 7 Correlation and Regression Analysis -...

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CORRELATION AND REGRESSION ANALYSIS Session goals:  correlation, portfolio statistics 
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2 Risk Capital budgeting problems discussed so far have  ignored the issue of risk – discount rates were provided Risk-return relationship is a key concept in finance Risk and return: Investors earn a reward for bearing risk The higher the potential reward, the higher the risk How do we measure risk?
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3 Concepts You Need to Know Expected return Risk premium Variance Standard Deviation Covariance Correlation coefficient E[R] f R - E[R] 2 σ σ Y X, σ Y X, ρ
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4 Expected Return, Variance, Standard Deviation Available Assets: State of Economy Probability Asset A Asset B Asset C Asset D Asset E Market Portfolio Risk Free Asset Boom 1/3 9% 22% 66% -9% 17% 30% 4% Normal 1/3 -6% -3% -33% 1% 7% 10% 4% Recession 1/3 9% 2% 6% 11% -3% -10% 4% E(R i ) 4.0% 7.0% 13.00% 1.00% 7.0% 10.0% 4.0% Var(R i ) 0.005 0.012 0.166 0.007 0.007 0.027 0.000 SD(R i ) 7.07% 10.80% 40.72% 8.16% 8.16% 16.33% 0.00% Asset A: ( 29 ( 29 ( 29 ( 29 ( 29 % 07 . 7 005 . 0 R σ ) σ(R 005 . 0 % 4 9% 3 1 % 4 % 6 3 1 % 4 9% 3 1 R σ % 4 04 . 0 % 9 3 1 %) 6 ( 3 1 % 9 3 1 ) E(R 2 A 2 2 2 A
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7. FIN 301-F09 Lab 7 Correlation and Regression Analysis -...

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