Interest rates

1. Required rates of return: the minimum rate of return an investor must receive in
order to accept the investment.
2. Discount rates: the rate at which we discount the future amount to find its value
today.
3. Opportunity cost: the value that investors forgo by choosing a particular course of
action.
TVM
● Annuity due = PV + PMT
● Perpetuity = never ends

READING 2: ORGANIZING, VISUALIZING, AND DESCRIBING DATA

Module 2.1: Organizing data
LOS 2.a: Identify and compare data types
● Data: information in any form
● Data types:
○ Numerical versus categorical
○ Time series versus cross-sectional
○ Structured vs unstructured
Numerical vs Categorical
● Numerical data (quantitative data): values that can be counted or measured
○ Discrete data: countable such as the months, days, or hours in a year
○ Continuous data: can take any fractional value
○ Can perform mathematical operations only on numerical data
● Categorical data (qualitative data): labels that can be used to classify data into groups
○ Nominal data: labels that cannot be placed in order logically
○ Ordinal data: ranked in a logical order. Item is assigned to one of multiple
categories based on a specific characteristic, then these categories are ordered
with respect to that characteristic
Time Series and Cross-Sectional Data
● Time Series: set of observations taken periodically, most often at equal intervals over
time. (ex. Daily closing prices, quarterly earnings per share of a company over a five-
year period)
● Cross-sectional: refers to a set of comparable observations all taken at one specific
point in time.
● Panel data: combination of time series and cross-sectional data
Structured and Unstructured Data
● Structured data: examples include time series, cross-sectional and panel data;
organized in a defined way
● Unstructured data: refers to information that is presented in a form with no defined
structure; transformed into structured data for analysis
LOS 2.b: Describe how data are organized for quantitative analysis
● Typically organized into arrays for analysis
○ One-dimensional array: represents a single variable
 ○ Two-dimensional array or data table

LOS 2.c: Interpret frequency and related distributions

● Frequency distribution: tabular presentation of statistical data that aids the analysis of
large data sets. Summarize statistical data by assigning them to specified groups, or
intervals
Step 1: Define the intervals
Step 2: Tally the observations
Step 3: Count the observations - absolute frequency, or simply the frequency is the
actual number of observations that fall within a given interval
● Relative frequency: calculated by dividing the absolute frequency of each return
interval by the total number of observations. Relative frequency is the percentage of
total observations falling within each interval.
● Contingency table: two-dimensional array within which we can analyze two variables at
the same time.
○ Rows represent attributes of one of the variables
○ Columns represent attributes of the other variable.
○ Attributes can be defined using nominal or ordinal data, but must be a finite
number of them
○ Joint frequencies: data in each cell show the frequency with which we observe
two attributes simultaneously; can be absolute or relative
○ Marginal frequency: total of frequencies for a row or a column
○ Confusion Matrix: for each two possible outcomes, a confusion matrix displays
the number of occurrences predicted and the number actually observed

LOS 2.e: Describe wys that data may be visualized and evaluate tuses of specific visualizations
● Histogram: graphical presentation of the absolute frequency distributions. A bar chart of
continuos data that has been classified into a frequency distribution.
● Frequency polygon: successive frequencies at the midpoints of the intervals are joined
with line segments.

● Cumulative frequency distribution chart: displays either the cumulative absolute

frequency or the cumulative relative frequency.

● Bar chart: can be displayed vertically or horizontally

● Grouped bar chart or clustered bar chart: can illustrate two categories at once

● Stacked bar chart: the height of each bar represents the the cumulative frequency for a
category and colors shown within each bar present joint frequencies
● Tree map: visualizes the relative sizes of categories

● Word cloud: for analyzing text, count the uses of specific words in text data

● Line charts: useful for illustrating time series data, such as securities prices
 ○ Multiple time series can be displayed on a line chart if their scales are
comparable.
○ Also possible to display to time series on a line chart if their scales are different
using left and right vertical axes to show changes in two variables over time
relative to each other

● Bubble line chart:

Below chart suggests that the company was adding salespeople during the growth
period but has been reducing its sales force recently.
● Scatter plot: way of displaying how two variables tend to change in relation to each
other; useful for identifying nonlinear relationships that are not apparent when using the
measure of the strength of a linear relationship

● Scatter plot matrix: to analyze three variables at the same time

● Heat map: uses color and shade to display data frequency
LOS 2.f: Describe how to select among visualization types
● Relationships: Scatter plots, scatter plot matrices, and heat maps
● Comparisons: Bar charts, tree maps, and heat maps for comparisons among
categories; line charts, dual-scale line charts and bubble line charts for comparisons
over time
● Distributions: Histograms, frequency polygons and cumulative distribution charts for
numerical data, bar charts, tree maps and heat maps for categorical data and word
clouds for text data

Module 2.3: Measures of Central Tendency

LOS 2.g: Calculate and interpret measures of central tendency
● Measures of Central Tendency: identify the center, or average, of a data set; used to
represent the typical, or expected, value in the data set.
● Population mean (N): all observed values in the population are sumed (ΣX) and divided
by the number of observations in the population.
● Sample mean (n): sum of all the values in the sample of a population divided by the
number of observations in the sample, n. Used to make inferences about the population
mean.
● Arithmetic mean: sum of the observation values divided by the number of observations.
Most widely used measure of central tendency and has the following properties:
1. All interval and ratio data sets have an arithmetic mean.
2. All data values are considered and included in the arithmetic mean computation.
3. A data set has only one arithmetic mean (i.e., the arithmetic mean is unique)
The only measure of tendency for which the sum of the deviation from the mean is zero.
● Outliers: unusually large or small values
● Trimmed mean: excludes outliers from a measure of central tendency
● Winsorized mean: substitute a value for the highest and lowest observations
● Weighted mean (weighted average): recognizes that different observations may have a
disproportionate influence on the mean.

● Median: midpoint of a data set when the data is arranged in ascending or descending
order.
● Mode: value the occurs most frequently in a data set
● Geometric mean: often used when calculating investment returns over multiple periods
or when measuring compound growth rates
When calculating the geometric mean for returns data set, it is necessary to add 1 to
each value under the radical and then subtract 1 from the result
 ● Harmonic mean: used for certain computations, such as the average cost of shares

purchased over time

● For values that are not all equal:
Harmonic mean < geometric mean < arithmetic mean

LOS 2.h: Evaluate alternative definitions of mean to address an investment problem

● Arithmetic mean: Estimate the next observation, expected value of observation
● Geometric mean: Compound rate of returns over multiple periods
● Trimmed mean: Estimate the mean without the effects of a given percentage of outliers
● Winsorized mean: Decrease the effect of outliers on the mean
● Harmonic mean: Calculate the average share cost from periodic purchases in a fixed
dollar amount

Module 2.4: Measures of Location and Dispersion

LOS 2.i: Calculate quantiles and interpret related visualizations