Quantitative Methods in Risk Management (FIN3019)

Tutorial 1 – Describing Data Numerical

The table below gives the annual total returns on the MSCI Germany Index from 2002 to
2011. The returns are in percentages. Use the information in this table to answer
Questions 1 - 4

MSCI Germany Index Total

Returns, 2002-2011

Year Return
2002 46.21%
2003 -6.18%
2004 8.04%
2005 22.87%
2006 45.90%
2007 20.32%
2008 41.20%
2009 -9.53%
2010 -17.75%
2011 -43.06%

Question 1
To describe the central tendency of the distribution, perform the following:
a) Calculate the sample mean return
Mean = ∑ X / n
Mean = 46.21 + (-6.18) + 8.04 + 22.87 + 45.90 + 20.32 + 41.20 + (-9.53) + (-17.75) + (-43.06) =
108.02 / 10 = 10.802%
b) Calculate the median return
-43.06, -17.75, -9.53, -6.18, 8.04, 20.32, 22.87, 41.20, 45.90, 46.21
= 8.04 + 20.32 = 28.36 / 2 = 14.18%

Question 2
To describe the compound rate of growth of the MSCI Germany Index, Calculate the
Geometric mean return.
46.21 = 0.4621 + 1 = 1.4621
-6.18 = -0.0618 + 1 = 0.9382
8.04 = 0.0804 + 1 = 1.0804
22.87 = 0.2287 + 1 = 1.2287
45.90 = 0.4590 + 1 = 1.4590
20.32 = 0.2032 + 1 = 1.2032
41.20 = 0.4120 + 1 = 1.4120
-9.53 = -0.0953 + 1 = 0.9047
-17.75 = -0.1775 + 1 = 0.8225
-43.06 = -0.4306 + 1 = 0.5694
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GM = (1.4621 x 0.9382 x 1.0804 x 1.2287 x 1.4590 x 1.2032 x 1.4120 x 0.9047 x 0.8225 x 0.5694 =

INCOMPLETE!

Question 3
To describe the values at which certain returns fall, calculate the 30th percentile
Ly = (n+1)*y/100
L30 = (10+1)*30/100
= 11.0.3 = 3.3

-43.06, -17.75, -9.53, -6.18, 8.04, 20.32, 22.87, 41.20, 45.90, 46.21
Value # 3 + 0.3 of the difference between values 3 & 4

= -9.53 + 0.3 [-6.18 – (-9.53)]

= -9.53 + 0.3 (3.35)
= -9.53 + 1.005 = 8.525

40th Percentile
= -6.18 + 0.4 [8.04 – (-6.18)]
= -6.18 + 0.4 (14.22)
= -6.18 + 0.5688
= -0.492

Question 4
To describe the dispersion of the distribution, perform the following:
a) Calculate the range
= X largest – X smallest
= 46.21 – (-43.06)
= 89.27
b) Calculate the variance
Variance =
= 896.84
c) Calculate the standard deviation
SD = √896.84 = 29.95

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Question 5
Portfolio Deviations from benchmark annual returns over a 12-year period:

Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
% -7.14 1.62 2.48 -2.59 9.37 -0.55 -0.89 -9.19 -5.11 -0.49 6.84 3.04

a) Calculate the frequency with 4 intervals and cumulative frequency for the portfolio’s
deviations.
Range
= X largest – X smallest
= 9.37 – (-9.19)
= 18.56

Interval = 18.56/4 = 4.64

Ordered list
-9.19
-7.14
-5.11
-2.59
-0.89
-0.55
-0.49
1.62
2.48
3.04
6.84
9.37

WIDTH = 4.64
-9.19 + 4.64 = -4.55
-4.55 + 4.64 = 0.09
0.09 + 4.64 = 4.73
4.73 + 4.64 = 9.37

-9.19 to < -4.55 - 3

-4.55 to < 0.09 - 4
0.09 to < 4.73 - 3
4.73 to < 9.37 - 2

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 b) Construct a histogram using the data

4
3
2
1
0
A B C D

c) Calculate the standard deviation (tracking risk) of the portfolio

Mean:
-9.19 + -7.14 + -5.11+ -2.59 + -0.89 + -0.55 + -0.49 + 1.62 + 2.48 + 3.04 + 6.84 + 9.37
= -2.61/12
= -0.2175

X-Ẍ
-9.19 – (-0.2175) = -8.9725
-7.14 – (-0.2175) = -6.9225
-5.11 – (-0.2175) = -4.8925
-2.59 – (-0.2175) = -2.3725
-0.89 – (-0.2175) = -0.6725
-0.55 – (-0.2175) = -0.3325
-0.49 – (-0.2175) = -0.2725
1.62 – (-0.2175) = 1.8375
2.48 – (-0.2175) = 2.6975
3.04 – (-0.2175) = 3.2575
6.84 – (-0.2175) = 7.0575
9.37 – (-0.2175) = 9.5875

(X - Ẍ)2
80.50576
47.92101
23.93656
5.628756
0.452256
0.110556
0.074256
3.376406
7.276506
10.61131
49.80831
91.92016

TOTAL = 321.6218

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Variance = 321.6218/n-1 = 321.6218/12-1 = 321.6218/11 = 29.23834
Standard Deviation = √29.23834 = 5.41%

Question 6

CAN Limited Investment returns over a 10-year period is provided below:

Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
% 36.21 -16.18 -1.96 12.87 35.90 10.32 31.20 -19.53 -7.75 -33.06

a) Create a frequency distribution with 5 intervals (round the second decimal

place up)
b) Calculate the cumulative frequency of the data
c) State whether the distribution is symmetric or asymmetric. If it is
asymmetric, what is the nature of the asymmetry?
d) Calculate the sample mean return
e) Calculate the median return
f) Calculate the geometric mean return
g) Calculate the variance and standard deviation
h) Calculate the Sharpe Ratio if the risk-free rate is 3%

Question 7

If the mean of a population is 250 and its standard deviation is 20, approximately what
proportion of observations is in the interval between:

a) 190 and 310

190 210 230 250 270 290 310
Therefore, K=3
At least 100 (1/1k2) = [1-1/(32)] = [1-1/(9)] = 0.888 / 89%

b) 210 and 290

210 230 250 270 290
Therefore, K=2
At least 100 (1/1k2) = [1-1/(22)] = [1-1/(4)] = 0.75 / 75%

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