Applications of Statistics in Finance Using the Statistics Online Computational Resource (SOCR)

• Activity Number: 451
• Type: Contributed
• Date/Time: Wednesday, August 6, 2008 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economics Statistics Section
• Author(s): Nicolas Christou*+ and Ivo D. Dinov
• Companies: University of California, Los Angeles and University of California, Los Angeles
• Keywords: efficient frontier ; covariance ; portfolio risk and return ; stock market ; Java applets ; SOCR

Abstract

In this paper we present an application of statistics in finance using SOCR. Most, if not all, college students have some familiarity with the stock market and therefore can understand the problem easily. It is the real data analysis that students find interesting and sometimes challenging. Here we explore the building of efficient portfolios using real stock market data through optimization examples of two, or multiple stocks, and how covariance and correlation can help the investor to diversify his or her risk. We discuss why diversification works, but also the problems that arise in portfolio management. Stock market data can be incorporated at any level of Mathematics, Statistics and Economics education. With the use of these newly designed SOCR applets and learning materials, we can enhance the teaching of statistics and portfolio management in varieties of curricula.