Applications of statistics in finance

what is statistics?

• The term statistics refers to a group of figures that are used to represent information about human interest.

• The data obtained in this process is used in decision making process.

• Financial analyst use statistical methods to analyze, evaluate and summarize large volumes of data into a mathematical form that is useful.

• Statistics play a leading role in finance, statistical analysis has become a powerful tool for better Market valuation.

• Financial analysts use spread sheet and statistical software packages to analyse financial data, spot trends and deveop forecasts.

Applications of statistics in finance

Financial Ratios :

• Financial ratios comprises another family of relevant statistics that are frequently used to assess the financial health and development of individual firms.

• While some of the more prominent financial ratios related to profitability, others can be used to assess other characteristics of a firm that ultimately points out reasons for the resulting profitability.

• Activity ratios measure how effectively the firm is able to use various categories of assets to generate sales and revenues.

• Statistics can be very useful for exploring, explaining and forecasting a firm’s financial performance.

Interest Rates

• Interest rates represent the price of the money in a particular currency.

• One common method for reporting interest rates is the yield curve.

• A yield curve represents a relevant comparison of yields between different securities with different maturity only if the security have similar risk.

• These statistics are frequently reported in the tabular form with yields on various securities shorted by maturity.

• The most common yield curve statistics relate to government bonds with in a particular country.

• Similar statistics can be graphed for corporate bonds with similar risk ratings.

Exchange Rate Statistics

• A more pervasive and continuous source of financial information is found in exchange rate statistics.
• An exchange rate is the price of one country’s currency in terms of another’s.
• For example, if the U.S dollar can be exchanged for 5 French, then residents in either country can quickly assess the value for real or financial assets in other country.
• Since this data is so important to international trade and capital flows, exchange rate statistics are widely reported in many periodicals and newspapers on the daily basis.

Gross domestic product

• There are many other examples of global economic statistics that have immediate relevance to financial analysis.

• One commonly followed statistic is the forecasted growth rate in gross domestic product (GDP).

• As an aggregate measure of overall output of a national economy, GDP growth is a highly anticipated figure.

• Many of the subcategories of GDP, such as government spending and exports, are closely followed as well.