1. Principles of Finance with Excel, 2nd edition Instructor materials
Chapter 9 Portfolio statistics

2. Don’t be afraid! You need only minimal statistics for Chapters 9 - 13.
You can do it all in Excel!

3. Finance concepts
How to calculate stock returns and adjust them for dividends and stock splits
Return mean, variance, and standard deviation for an asset
Return mean and variance for a portfolio of two assets
Regressions

4. Excel functions and techniques
Average
Var and Varp
Stdev and Stdevp
Covar and Correl
Trendlines (Excel’s term for regressions)
Slope, Intercept, Rsq

5. Main statistical concepts
Mean, average, expected return: The return you expect; here based on past returns. Denoted E(r) .
Variance of returns: A measure of the variability of returns. Denoted Var(r) or  2 .
Standard deviation of returns: Another measure of variability. Denoted  .

6. Main statistical concepts (2)
Covariance: Do the returns on two stocks “move” together? Meaning: When one stock goes up, does the other tend to go up also?
If “on average, yes,” then Covariance > 0
If “on average, no, they move in opposite directions,” then Covariance < 0.
Correlation: Another measure of how much two stocks “move” together.

7. The average annual return of Kellogg in 1998-2008 was 6. 00%
The average annual return of Kellogg in was 6.00%. The standard deviation of the return was 13.06%.
Technical notes:
The returns have been adjusted for dividends.
Note the use of the Excel functions Average, VarP, StDevP to compute the expected return, the variance of the returns, and the standard deviation.

8. Dividend adjustment Shareholders get two kinds of returns:
Capital gains/losses: Increase/decrease in stock price
Dividends
Example: Buy stock for $20, sell it one year later for $25. If stock paid dividend of $2, then your return was

9. Kellogg over longer period

10. Download data from Yahoo
Yahoo data includes dividends and stock splits into the price
You can thus compute the returns directly from the Yahoo adjusted price data

11. A typical Yahoo screen for historical prices
For more details on downloading data from Yahoo, see Appendix 9.1

12. Return data for Exxon (XOM)

13. XOM and K together

14. Covariance and correlation
Excel functions: Covar and Correl.
Note that correlation = Covar(GM,MSFT)/(GM* MSFT) (cell B19) .

15. Facts about covariance and correlation (1)
Covariance affected by units, correlation is not. If you measure returns in decimals (15% = 0.15), covariance different than if you measure returns in whole numbers (15% = 15).

16. Facts about covariance and correlation (2)
Covariance between GM and MSFT same as Covariance between MSFT and GM
Ditto for correlation

17. Correlation facts (1) Correlation always > -1 and < +1
Correlation +1 or -1 means perfect linear relation between two assets (examples to come)
Correlation usually between -1 and +1

18. Correlation facts (2)
If correlation = 1, then returns on one asset can be predicted by returns on second asset.

19. Morgan Sausage’s return is perfectly predictable from Adams Farm return.
Moreover, When Adams Farm , so does Morgan Sausage.
Correlation = +1.

21. Perfect negative correlation
Whenever Francisca does well, Jeremy does poorly, and vice versa. Jeremy’s performance is perfectly predictable from Francisca’s.
The correlation is -1.

23. Portfolio mean and standard deviation

24. Formulas

25. How to do a regression in Excel
Highlighted data is graphed in XY-Scatter chart.

26. Regression in Excel Mark the points on the chart Right-click on mouse
Add Trendline

27. Excel’s regression screen