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7. two returns because if you make it more complex right away it'll become
tough.
10. And let's for, just for the fun, call this Amazon,
12. Two companies most people have dealt with, know about, and so on.
14. The question then becomes, can you calculate the return on Amazon?
16. Z just for the heck of it, RAZ bar, and sigma hat AZ.
17. Here I can calculate R Microsoft bar and sigma hat Microsoft.
18. For being able to calculate it, which I promise you we will do with real data.
23. Because you need to understand concepts, data applications very clearly.
24. Okay, so you've done both, but what do I want to also measure?
26. Assuming you can afford to invest, I guarantee you that if you're a risk
averse
43. one number based on all the data you have, okay?
49. multiply the two that shows you how they're related.
51. So if you'll take the regular formula, the longer formula, it is sigma i p i.
55. over the entire full set of possibilities, i, how are they related?
58. Not by the same amount, necessarily, not exactly the same amount.
59. But, and when this tends to be positive, this also tends to be positive.
63. which happens rarely in the stock market between two stocks, we'll see why.
64. If this tends to be positive, this tends to be negative, the sign will be
negative.
66. suppose Amazon does whatever it does return, has nothing to do with
Microsoft.
67. So when it's negative, this then should be positive and when it's positive,
70. Very, very unlikely, in the real world, in the stock market.
71. The two returns, you'll see when it will happen, and you'll see why it's
unlikely.
78. I will repeat this whole exercise and show you why there's a problem.
91. Bushels is a way of measuring how much output you have in a crop.
94. In the case of returns because they are measured in percentage terms,
96. But it's very important to recognize that covariance is unit measurement
dependent.
97. Point number one, not a good thing because you cannot compare rain and
102. The second problem it suffers from, and I'll spend a little bit of time.
111. There are a lot of millimeters in inches, and, suddenly, the number will blow
up.
113. doesn't necessarily tell you anything, which is not a good thing, right?
114. So you would imagine 500 is more than 300, it should matter somewhat.
117. The problem is that it's unit dependent and its magnitude may not make
sense.
120. Meaning if it is greater than zero, less than zero, or zero, tells
121. you the nature of the relationship, but nothing about the units of the
magnitude.
124. That measures the relationships, retains the beauty of covariance, but
143. The second very good quality about correlation is you can show
150. But finally, do not forget that covariance is playing a very, very important
role.
153. So the basic nature of the relationship has been determined by covariance.
154. We'll take a break now, come back with one final concept,
158. And then we'll come back to applications and applications with data,
160. But we will have covered the fundamentals of statistics that you need to
know for
161. finance, at least the introductory finance.
162. And of course, you could apply it to many other things like we talked about,
rain,
165.