Explorations in Asset Returns with Examples in R

9 Pages Posted: 19 Sep 2015 Last revised: 20 Sep 2015

Date Written: September 18, 2015

Abstract

Robustness of common estimates (mean, volatility) from returns data depends on the period. It is common that we have a dataset of daily returns but would like to estimate and optimise portfolio allocations for the monthly horizon or longer. Statistical projection is required. To develop an intuition it is recommended to rediscover the rules taught about asset returns, the most common is the scaling of volatility with the square root of time period and how that affects probability density. Building histograms with varying bucket size as well as constructing Q-Q plots by-step help to gain appreciation about densities and empirical nature of probability distribution.

This tutorial comes in three sections covering projection with asset returns, density histogram, and empirical Q-Q plot construction, for which R code is provided in the Appendix.

Keywords: asset returns, projection, histogram, percentiles, Q-Q plot, Normality tests, iid, R

JEL Classification: C5, G11

Suggested Citation

Diamond, Richard V., Explorations in Asset Returns with Examples in R (September 18, 2015). Available at SSRN: https://ssrn.com/abstract=2662305 or http://dx.doi.org/10.2139/ssrn.2662305

Richard V. Diamond (Contact Author)

Fitch Group ( email )

30 North Colonnade
Canary Wharf
London, E14 5GN
United Kingdom

CQF Institute ( email )

55 Broad Street
New York, NY 10004
United States

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