Case study presentation

1. Case study presentation

Imagine that your savings are invested in 3 well known stocks:

2. Your savings

Microsoft, Yahoo and Apple.

3. Your savings

Now imagine that you have additional cash to invest and you want to invest in only one additional stock. How do you chose this stock?

4. Role of correlation

Correlation plays a major role. The correlation coefficient between your portfolio and all potential stocks gives an

5. Role of correlation

indication of how

6. Role of correlation

any potential stocks will move in relation to your portfolio.

7. Role of correlation

The rule number 1 in any investment is capital protection. Selecting a stock lowly correlated with your portfolio might not improve return but prevent you from experiencing severe losses which should always be the staring point of any sound investment. Obviously correlation is not the only criteria and you also have to take into account return and some of the constraints you might have but it is a very good starting point. R offers a vast range of metrics to evaluate potential investments. You will be using the PerformanceAnalytics package here.

8. Let's practice!

Let's put in practice everything we learn so far!

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