Investment A or Investment B?
Everybody knows a well known fact that high returns are often associated with high risk. In this project we are estimating and analyzing risk and return profiles of investment A and Investment B.
For this purpose, we calculated descriptive statistics using MS Excel tool. We calculated Central tendency, variance and shape parameters. The statistical parameters include mean, median, mode, standard deviation, variance, skewness and kurtosis. Along with these, range, minimum and maximum were also calculated. Amongst these mean, median and mode provide estimate on central tendency; standard deviation and variance provide estimate on variability and skewness and kurtosis describes shape of the distribution.
For the investment A Mean is 9.96% which is greater than median 8.99%. Thus, the data is skewed to the right with a tail stretching towards right. Mode is 11.73% which means most frequent occurring value is 11.73%.
Standard Deviation is 19.92% and variance is 396.95%. Value of skewness is 0.54 and kurtosis is -0.32.
For the investment B Mean is 11.61% which is greater than median 9.79%. Thus, the data is skewed to the right with a tail stretching towards right. Mode is N/A which means there is no duplicate value. All of the percentage return values occur only once.
Standard Deviation is 25.52% and variance is 651.40%. Value of skewness is 0.01 and kurtosis is -0.61. Value of skewness close to zero means the data is symmetrical. Negative value of kurtosis implies flatten curve.
Now, we compare the two investments based on statistical parameters. First we will take a look on central tendency parameter. Difference between mean and median is greater in Investment B than Investment A. Representing that skewness is greater in Investment B than Investment A. This provides the estimate that data will be more skewed to the right for Investment B. This means that most of the data will be constricted towards left and tail will have higher values stretching towards right. Mode was not reported for Investment B, meaning that there was no duplicate value (i.e. all the values occur once). It is interesting to observe that mode of Investment A (11.72%) is close to Mean of Investment B (11.61%).
Now, we discuss variability parameters. The two parameters standard deviation and variance provide estimate of variability. We all know that there exists relation between standard deviation and variance. And the relationship is that Variance is square of standard deviation. Standard Deviation and hence, variance is greater for Investment B (25.52%, 651.40%) compared to Investment A (19.92%, 396.95%). This implies that data for Investment B is more variable than Investment A.
Generally, most of the continuous data are checked for the assumption of normality so that we get an idea about distribution and statistical procedures that could be applied. Normal curve is bell shaped. The properties of this curve are described by the two parameters, kurtosis and skewness. Kurtosis for both the investment is negative indicating flatten curve rather than steep peak, but is greater for Investment A as compared to Investmnet B. Now, if we see the skewness parameter, similar trend will be observed. Skewness is greater for Investment A than Investment B. Moreover, value of skewness is very close to zero (0.01) for Investment B implying that the data is more or less symmetrical.
Apart from this, if we look at range, it is greater for Investment B compared to Investment A. Also, minimum of Investment B is less than Investment A and maximum is greater for Investment B than Investment A. But distance between minimum between Investment A and Investment B is greater than the distance between maximum of Investment A and Investment B.
When we look the data and statistical parameters on the whole and consider the phrase which we stated in the starting that for greater returns one has to take greater risk, then one should think of investing in Investment B. As it has higher returns (based on mean and median) and higher variability i.e. risk involved (based on variance or standard deviation). Moreover, risk part can also be looked as minimum for Investment B is less than Investment A.
