ABSTRACT

This introduction presents an overview of the key concepts covered in the subsequent chapters of this book. The book presents an introduction to the statistical methodology used in investment analysis and financial econometrics, which are concerned with analyzing the properties of financial markets and with evaluating potential investments. Data analysis is an important component of the methodology covered in this book and all of the methods presented are illustrated on genuine financial data. A major advance in the science of investment analysis took place beginning in the 1950s when probability theory began to be used to model the uncertainty inherent in any investment. The methods used in the statistical approach to investment analysis form an important component of the field known as quantitative finance or, more recently, financial engineering. The capital asset pricing model (CAPM), the market model, and single-index model are all based on the relationship between asset returns and the return on some form of a market portfolio.