Import data

##            data.DJIA.Adjusted
## 2003-01-02            8053.81
## 2003-02-03            7891.08
## 2003-03-03            7992.13
## 2003-04-01            8480.09
## 2003-05-01            8850.26
## 2003-06-02            8985.44
##            data.NFLX.Adjusted
## 2003-01-02           0.942857
## 2003-02-03           1.222143
## 2003-03-03           1.453571
## 2003-04-01           1.628571
## 2003-05-01           1.607143
## 2003-06-02           1.825000

Calculate returns

##                   DJIA
## 2003-02-03 -0.02020534
## 2003-03-03  0.01280557
## 2003-04-01  0.06105506
## 2003-05-01  0.04365165
## 2003-06-02  0.01527420
## 2003-07-01  0.02764020
##                   NFLX
## 2003-02-03  0.29621247
## 2003-03-03  0.18936246
## 2003-04-01  0.12039316
## 2003-05-01 -0.01315755
## 2003-06-02  0.13555545
## 2003-07-01  0.02544055

Q1 Are the returns normally distributed? Discuss your answer based skewness and kurtosis.

Netflix had a postiive skewness and positive kurtosis, making a large positive return more likely than a large negative return, whereas the dow had a negative skewness and a positive kurtosis, which means a large negative return is more likely than a large postive return.

## [1] -0.6833601
## [1] 0.6770262
## [1] 1.802551
## [1] 3.477641

Interpreation

When the return distribution is asymmetric (skewed), investors use additional risk measures that focus on describing the potential losses.

Q2 Interpret Semi-deviation

The semi-deviation is 0.1161 meaning that the deviation of returns under the mean is 11.61%.

Q3 Interpret Value-at-Risk (or VaR)

The VaR is -0.0581 this means that the largest expected loss with 95% confidence is 5.81%. A greater loss could happen but theres only a 5% chance.

Q4 Interpret Expected Shortfall

The expected shortfall is -0.0891 meaning that 8.91% is the normal average of .05.

Q5 Which of the two poses a greater downside risk? Answer your question based the three downside risk measures above.

Netflix has the great downside risk. The netflix semi-deviation is more volaltile below the mean. Netflix being 0.1161 while Dow is much smaller at 0.02755. The largest loss at 95% confidence was larger for netflix at -0.1961 while the dow is -0.0581. The average of negative monthly returns is larger for netflix being -.2263 while the dow is at -.0891

##                      DJIA
## Semi-Deviation 0.02763476
##                     NFLX
## Semi-Deviation 0.1161461
##            DJIA
## VaR -0.05847639
##           NFLX
## VaR -0.1961076
##           DJIA
## ES -0.09177945
##          NFLX
## ES -0.2263355

Interpreation

Q6 Explain why you need portfolio’s drawdowns in addition to downside risk measures you analyzed above.

Without risk you cant make stand to make anything, so volitility is nessacary.

Q7 Which of the two poses a greater risk of cumulative loss from peak to trough? Answer your question based on the drawdowns.

With data alone i dont think id invest in netflix because its high risk and high returns and its been around for awhile.

Q8 If you are a risk-loving investor, what would be your choice of investment between the two stocks considered? Discuss your answer using the measures you found here.

If i was a risk loving investor i would pick netflix becasuse i stand the most to gain.

##         From     Trough         To   Depth Length To Trough Recovery
## 1 2007-11-01 2009-02-02 2013-02-01 -0.4930     64        16       48
## 2 2015-03-02 2015-09-01 2016-07-01 -0.1019     17         7       10
## 3 2005-01-03 2005-04-01 2005-11-01 -0.0548     11         4        7
## 4 2014-01-02 2014-01-02 2014-04-01 -0.0530      4         1        3
## 5 2004-03-01 2004-10-01 2004-12-01 -0.0526     10         8        2

##         From     Trough         To   Depth Length To Trough Recovery
## 1 2011-06-01 2012-09-04 2013-08-01 -0.7990     27        16       11
## 2 2004-02-02 2004-10-01 2009-03-02 -0.7420     62         9       53
## 3 2014-09-02 2014-12-01 2015-04-01 -0.2848      8         4        4
## 4 2014-03-03 2014-04-01 2014-08-01 -0.2773      6         2        4
## 5 2015-12-01 2016-04-01 2016-10-03 -0.2700     11         5        6