THE ARITHMETIC MEAN

For sample values, x1, x2, , xn, the sample mean

is computed as

For population values, x1, x2, , xN, the population mean is computed as

For multiperiod returns R1, R2, , Rn, the geometric mean return GR is computed as
where n is the number of multiperiod returns.
For growth rates g1, g2, , gn, the average growth rate Gg is computed as:
where n is the number of multiperiod growth rates.
For observations x1, x2, , xn, the average growth rate Gg is computed as:

where n 1 is the number of distinct growth rates. Note that only the first and last observations are
needed in the time series due to cancellations in the formula.

Lp= (n+1) P/100

Measures if dispersion
Mean absolute deviation
The mean absolute deviation (MAD) is an average of the absolute differences between the
observations and the mean
For sample values, x1, x2, , xn, the sample MAD is computed as

For population values, x1, x2, , xn, the population MAD is computed as

THE VARIANCE AND THE STANDARD DEVIATION

For sample values, x1, x2, , xn, the sample variance s2 and thesample standard deviation s are
computed as

For population values, x1, x2, , xN, the population variance 2 and thepopulation standard
deviation are computed as

Note: The sample variance uses n 1 rather than n in the denominator;

THE COEFFICIENT OF VARIATION (CV)

The Sharpe ratio measures the extra reward per unit of risk. The Sharpe ratio for an investment I is
computed as:
where I is the mean return for the investment, f is the mean return for a risk-free asset such as a
Treasury bill (T-bill), and sI is the standard deviation for the investment.
CHEBYSHEV'S THEOREM
For any data set, the proportion of observations that lie within k standard deviations from the mean is at
least 1 1/k2, where k is any number greater than 1.

Grouped data
CALCULATING THE MEAN AND THE VARIANCE FOR A FREQUENCY DISTRIBUTION

where mi and fi are the midpoint and the frequency of the ith class, respectively. The standard deviation is
the positive square root of the variance.
THE WEIGHTED MEAN

Let w1, w2, , wn denote the weights of the sample observations x1, x2, , xn such that w1 + w2 +
+ wn = 1. The weighted mean for the sample is computed as
= wixi.
The weighted mean for the population is computed similarly.
THE COVARIANCE
For values (x1, y1), (x2, y2), , (xn, yn), the sample covariance sxy is computed as
For values (x1, y1), (x2, y2), , (xN, yN), the population covariance xyis computed as
Note: As in the case of the sample variance, the sample covariance uses n 1 rather than n in the
denominator.

THE CORRELATION COEFFICIENT

Sample Correlation Coefficient:
Population Correlation Coefficient:
CONVERTING AN ODDS RATIO TO A PROBABILITY
Given odds for event A occurring of a to b, the probability of A is
Given odds against event A occurring of a to b, the probability of A is
c

The complement rule states that the probability of the complement of an event, P(A ), is equal to one
c

minus the probability of the event, or equivalently, P(A ) = 1 P(A).

BAYES' THEOREM
Given a set of prior probabilities for an event of interest, upon the arrival of new information, the rule for
updating the probability of the event is Bayes' theorem. Here P(B) is the prior probability and P(B|A) is
the posterior probability:

or equivalently,

THE COMBINATION FORMULA

The number of ways to choose x objects from a total of n objects, where the order in which the x objects
are listed does not matter, is calculated using the combination formula:

THE PERMUTATION FORMULA

The number of ways to choose x objects from a total of n objects, where the order in which the x objects
is listed does matter, is calculated using the permutation formula:

P(A B) =P(A|B)P(B) or P(A B) = P(B|A)P(A).

Expected value of X is calculated as

Given two random variables X and Y, the expected value of their sum, E(X + Y), is equal to the sum of
their individual expected values, E(X) andE(Y), or
Using algebra, it can be shown that the variance of the sum of two random variables, Var(X + Y), yields
where Cov is the covariance between the random variables X and Y.
For given constants a and b, the above results are extended as:

Given a portfolio with two assets, Asset A and Asset B, the expected return of the portfolio E(Rp) is
computed as
where wA and wB are the portfolio weights wA + wB = 1 and E(RA) andE(RB) are the expected returns on
assets A and B, respectively.
PORTFOLIO VARIANCE
The portfolio variance,

, is calculated as

or, equivalently,
where 2A and 2B are the variances of the returns for Asset A and Asset B, respectively, AB is the
covariance between the returns for Asset A and Asset B, and AB is the correlation coefficient between the
returns for Asset A and Asset B.

binomial random variable X is defined as the number of successes achieved in the n trials of a
Bernoulli process. A binomial probability distribution shows the probabilities associated with the
possible values of the binomial random variable.
THE BINOMIAL PROBABILITY DISTRIBUTION
For a binomial random variable X, the probability of x successes in n Bernoulli trials is

for x = 0, 1, 2, , n. By definition,
EXPECTED VALUE, VARIANCE, AND STANDARD DEVIATION OF A BINOMIAL RANDOM VARIABLE
If X is a binomial random variable, then

THE POISSON PROBABILITY DISTRIBUTION

For a Poisson random variable X, the probability of x successes over a given interval of time or space is

for x = 0, 1, 2, , where is the mean number of successes and e 2.718 is the base of the natural
logarithm.
EXPECTED VALUE, VARIANCE, AND STANDARD DEVIATION OF A POISSON RANDOM VARIABLE
If X is a Poisson random variable, then

THE CONTINUOUS UNIFORM DISTRIBUTION

A random variable X follows the continuous uniform distribution if its probability density function is

where a and b represent the lower and upper limits of values, respectively, that the random variable
assumes.
The expected value and the standard deviation of X are computed as

Z=(X-MU )/ Sigma

THE NORMAL DISTRIBUTION

A random variable X with mean and variance 2 follows the normal distribution if its probability density
function is

where equals approximately 3.14159 and exp(x) = ex is the exponential function where e 2.718 is the
base of the natural logarithm.
STANDARD NORMAL DISTRIBUTION
A standard normal random variable Z is a normal random variable withE(Z) = 0 and SD(Z) = 1.
The z table provides cumulative probabilities P(Z z) for positive and for negative values of z.

ESTIMATOR AND ESTIMATE

When a statistic is used to estimate a parameter, it is referred to as an estimator. A particular value of the
estimator is called an estimate.
The expected value of

equals the population mean, or E( ) = . The standard deviation of

equals

the population standard deviation divided by the square root of the sample size, or

SAMPLING FROM A NORMAL POPULATION

For any sample size n, the sampling distribution of
is drawn is normally distributed.
If

is normal if the population X from which the sample

is normal we can transform it into the standard normal random variable as:

Therefore any value

on

has a corresponding value z on Z given by

THE CENTRAL LIMIT THEOREM FOR THE SAMPLE MEAN

For any population X with expected value and standard deviation , the sampling distribution of will
be approximately normal if the sample size n is sufficiently large. As a general guideline, the normal
distribution approximation is justified when n 30.
As before, if

is approximately normal, then we can transform it to

The sampling distribution of sample proportion

EXPECTED VALUE AND STANDARD DEVIATION OF THE SAMPLE PROPORTION
The expected value of equals the population proportion, or E( ) = p.
The Standard Deviation of

equals

THE CENTRAL LIMIT THEOREM FOR THE SAMPLE PROPORTION

For any population proportion p, the sampling distribution of isapproximately normal if the sample
size n is sufficiently large. As a general guideline, the normal distribution approximation is justified
whennp 5 and n(1 p) 5.
If is normal, we can transform it into the standard normal random variable as

Therefore any value

on

has a corresponding value z on Z given by

THE FINITE POPULATION CORRECTION FACTOR FOR THE SAMPLE MEAN

We use the finite population correction factor to reduce the sampling variation of
standard deviation is

The transformation of

. The resulting

to Z is made accordingly.

Can be applied when sample at least 5% of population i.e. n>= 0.05N

CONFIDENCE INTERVAL FOR WHEN IS KNOWN

A 100(1 )% confidence interval of the population mean when the population standard deviation is
known is computed as

Greater population, smaller sample size, confidence interval width wider

THE T DISTRIBUTION
If repeated samples of size n are taken from a normal population with a finite variance, then the
statistic

follows the t distribution with (n 1) degrees of freedom, df.

CONFIDENCE INTERVAL FOR WHEN IS NOT KNOWN

A 100(1 )% confidence interval of the population mean when the population standard deviation is
not known is computed as

where s is the sample standard deviation.

CONFIDENCE INTERVAL FOR P

A 100(1 )% confidence interval of the population proportion p is computed as

Std. error = Sd. Dev / sqrt n

Confidence interval = X bar+t (Sd. Dev / sqrt n)

ONE-TAILED VERSUS TWO-TAILED HYPOTHESIS TESTS

A Type I error is committed when we reject the null hypothesis when the null hypothesis is true. A Type II
error is made when we do not reject the null hypothesis when the null hypothesis is false. The probability
of a Type I error is denoted by and the probability of a Type II error is denoted by. For a given sample
size n, a decrease in will increase and vice versa. Both and decrease as n increases.

Choosing data Data, Sample,Purpose

EST STATISTIC FOR WHEN IS KNOWN

The value of the test statistic for the hypothesis test of the population mean when the population
standard deviation is known is computed as

where 0 is the hypothesized mean value.

IMPLEMENTING A TWO-TAILED TEST USING A CONFIDENCE INTERVAL

The general specification for a 100(1 )% confidence interval of the population mean when the
population standard deviation is known is computed as

TEST STATISTIC FOR WHEN IS UNKNOWN

When the population standard deviation is unknown, the test statistic for testing the population
mean is assumed to follow the tdfdistribution with n 1 degrees of freedom, and its value is computed
as

Hypothesis Test of the Population Proportion

TEST STATISTIC FOR P
The test statistic for the hypothesis test of the population proportion pis assumed to follow
the z distribution and its value is computed as
hypothesized value of the population proportion.

, where

= x/n and p0 is the