Business application of mathematics Essay Example | Topics and Well Written Essays - 750 words

Business application of mathematics - Essay Example A simple formula is then derived to select the best five funds from each sector. For low risk investors, the 1st, 3rd and 5th year cumulative performance to the last quarter columns and fund size were used as metrics to decide the best 5 funds from each sector. Basic financial theory states that outsized returns can be generated only by taking risks, so although a fund may exhibit excellent returns, an investor should incorporate risk into the analysis to determine the risk-adjusted performance of the fund and how it compares to other investments. There are several metrics to use when analysing funds, one can decide to use kurtosis, skewness, standard deviation, mean, minimum and maximum functions, value at risk or any other metric or any combination of these metrics. Combining many of these metrics in the analysis of funds is an intensive way of getting the best funds. The metrics used to analyse the funds sometimes give different funds as the best. Most people however use fund size and 1st, 3rd and 5th yearly cumulative values to easily select the best funds. Skewness is a measure of the asymmetry of data in this case, the returns. Positive skewness means mean>median>mode. Negative skewness indicates the probability of a very high risk even if the probability is low. Kurtosis measures the level of flatness of a distribution. Negative kurtosis, indicates a lower probability of results around the mean, and lower probability of extreme values. A positive kurtosis indicates a higher probability of results near the mean, but also a higher probability of extreme values.   The idea of thought behind this criterion is that the yearly cumulative performance to the last quarter is a vital metric that indicates fund performance in the market. Another important metric that investors look at is fund size. Among the yearly cumulative performance columns, a fund that will