EMBI
Quantitative Methods for Management
- The EMBI Investor -
1. Purpose of the Assignment
The purpose of this assignment is to review and to adopt the statistical concepts (mean, standard deviation, regression coefficient, confidence limits, etc.) which we have learned in the first two classes, and to develop our further understanding of how those concepts can be used in business management.
2. Calculation Assumptions
Expected return : the mean of daily returns daily return(t) = (price(t) – price(t-1)) / price (t-1)
Here, I define expected return as “the mean of daily returns”, not “the mean of daily excessive return”. Thus, “risk-free-rate” is not used in calculation processes.
Risk : the standard deviation of daily returns
Beta : the slope coefficient in a liner regression (X: the daily return of the EMBI; Y: the daily return of country indexes)
3. Calculation Result
10 country indexes sorted by Expected return, Risk, and Beta:
(see Appendix for scatter diagrams)
95% confidence limits of Beta, R, and R square of 10 country indexes:
4. Interpretation of Results
Risk vs. Expected Return
According to the results, we can see that while some country indexes have economic rationality, high risk high return (Argentina, Indonesia) low risk low return (Poland), others take a unique move, high risk low return (Hungary), low risk high return (Vietnam).
The EMBI, which combines all these characteristics, seems well built. While the EMBI secures middle return, its risk remains at the lowest level. Comparing an investment efficiency of each country index with that of the EMBI by taking the ratio of expected risk and return (see right table), only Vietnam exceeds the EMBI.
Beta, R, and R2
According to the results, we can see that all country indexes have positive Beta and R. Therefore, the return of each country index does not respond in an opposite direction to that of the EMBI. In Beta, we can get an initial idea of market
- The EMBI Investor -
1. Purpose of the Assignment
The purpose of this assignment is to review and to adopt the statistical concepts (mean, standard deviation, regression coefficient, confidence limits, etc.) which we have learned in the first two classes, and to develop our further understanding of how those concepts can be used in business management.
2. Calculation Assumptions
Expected return : the mean of daily returns daily return(t) = (price(t) – price(t-1)) / price (t-1)
Here, I define expected return as “the mean of daily returns”, not “the mean of daily excessive return”. Thus, “risk-free-rate” is not used in calculation processes.
Risk : the standard deviation of daily returns
Beta : the slope coefficient in a liner regression (X: the daily return of the EMBI; Y: the daily return of country indexes)
3. Calculation Result
10 country indexes sorted by Expected return, Risk, and Beta:
(see Appendix for scatter diagrams)
95% confidence limits of Beta, R, and R square of 10 country indexes:
4. Interpretation of Results
Risk vs. Expected Return
According to the results, we can see that while some country indexes have economic rationality, high risk high return (Argentina, Indonesia) low risk low return (Poland), others take a unique move, high risk low return (Hungary), low risk high return (Vietnam).
The EMBI, which combines all these characteristics, seems well built. While the EMBI secures middle return, its risk remains at the lowest level. Comparing an investment efficiency of each country index with that of the EMBI by taking the ratio of expected risk and return (see right table), only Vietnam exceeds the EMBI.
Beta, R, and R2
According to the results, we can see that all country indexes have positive Beta and R. Therefore, the return of each country index does not respond in an opposite direction to that of the EMBI. In Beta, we can get an initial idea of market