MEASURING RISK USING PAST DATA

PRESENTED BY: HARSH JAIN PGDM, ROLL-5130

 Future price and future rate of return will be drawn out by probability distribution.  The distribution from which the outcome is drawn by changing over time (time varying) like when the interest rates are high than there is a deal of high risk in the stock market, and when the interest rates are low than stock market is low.  The historical record or data help us to make inferences about the variance of the distribution from future results will be drawn.

 Prices are not independent and identically distributed. From that daily prices are also not independent like tomorrows stock price is dependent on todays stock price.  Past data can be used to find out the expected value and variance of securitys rate of return distribution.  Past data on percentage changes in interest rates can be used to estimate the expected percentage change in interest rates and the variance of the percentage changes in interest rates.

 The historical is often used as an estimate of the future . Much less often, and generally incorrectly, for some past period is used as an estimate of r, the expected future return. Because past variability is likely to be repeated, S may be a good estimate of future risk.  But it is much less reasonable to expect that the past level of return (which could have been as high as 100% or as low as 50%) is the best expectation of what investors think will happen in the future.

 We can use past data to find out the estimate value of mean and variance of underlying distribution.

 The probability distribution from which the past observation were drawn has remained constant, and it will also remain constant in future perspectives.