Texas Instruments BAII Plus

Tutorial for Use with

Essentials of Financial Management 2/e

This tutorial was developed for use with Brigham and Houstons Essentials of
Financial Management, 2/e, especially Chapter 8, the Time Value of Money.
The calculators 143-page manual covers all of its functions in detail, and it is
worth the time to go through the manual. However, this does take time, and
many of the calculators features are not necessary for working the problems
in the text. Therefore, we focus on just whats needed to work the text
problems. We recommend that you read the text to get an idea about the
concepts, then go through the tutorial to learn how to work the problems
efficiently. The examples in the tutorial are identical to the examples in the
text, which makes simultaneous coverage especially efficient.
Although the tutorial focuses on Chapter 8, it does have a section on Statistical
Calculations, which are needed for Chapter 7 of the text. Also, note that the
TVM applications covered in text Chapter 8 and this tutorial are required for
many text chapters, especially those dealing with bond and stock valuation
and capital budgeting. Therefore, it will pay big dividends to learn how to use
your calculator early in the course, like right now.

BASIC CALCULATOR FEATURES

Turning the calculator ON and OFF
To turn the calculator on and off, press ON/OFF . Note that turning the
calculator off clears the display. Also, the calculator turns itself off about 10
minutes after the last keystroke to conserve the battery. Note too that it has
continuous memory, so turning it off does not affect data stored in the
registers even though the display goes to zero.

The Gold Shift Key, 2nd

Most of the keys have white numbers or lettering directly on top and then
gold lettering on the frame just above the keys. If the 2nd key has
not been pressed then the white keys are active. However, if you
press 2nd , then the gold keys are activated, and the word 2nd

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appears in the upper left corner of the LCD display. Press the 2nd key
again and 2nd" goes away and the white keys are activated. The
2nd key thus toggles between the primary (white) and secondary
(gold) functions. After you press 2nd , look only at the gold functions.
In this tutorial, whenever you see 2nd , the lettering on the next key
will refer to the gold, not white, lettering.

Memories
The calculator has several different sets of memories, or registers. The ones
we use most frequently, and discuss in the tutorial, are the TVM and Cash Flow
memories. You can read about the others in the calculator manual.

Clearing the calculator

Clearing the calculators memories is important because leftover data can lead
to errors. You should get into the habit of automatically clearing memory
before starting a new calculation. Occasionally, you will want to save data, but
generally you will be entering all new data, so starting with a clear memory is
the safest approach.
There are several different ways to clear data:

clears numbers on the display one at a

time.
CE/C
memory.
2nd CLR WORK
TVM.
2nd CLR TVM
CF 2nd CLR WORK
2nd MEM 2nd CLR WORK

clears the entire display, but not the

clears all memories except that for the
clears the TVM memory.
clears the cash flow register
clears certain special memories.

Changing the decimal display

Depending on what you are doing, you may want no decimal places, two
decimal places, 4 decimal places, etc. The number of decimals displayed can
be changed easily. To demonstrate, type 5555.5555 and then press = . If
your display is currently set for two decimal places, the value will be truncated
to 5555.56. To change the number of decimal places from 2 to 4, press 2nd
FORMAT 4 ENTER 2nd SET 2nd QUIT . Now if you type 5555.5555 and
then press = , the display will show 5,555.5555.
To change back from 4 decimal places to 2, press 2nd FORMAT 2 ENTER
2nd SET 2nd QUIT . Now if you type 5555.5555 and then press = , the
display will show 5,555.56.

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We usually set the display to 2 places, which is convenient when working with
dollars and percentages. However, we often use 4 decimal places when
dealing with interest rates and with rates of return that are entered as
decimals.

USING THE FINANCIAL FUNCTIONS

Settings: Periods per Year (P/Y)
The TI BAII Plus usually comes out-of-the-box set to assume that 12 payments
are made each year, or monthly.1 Generally, though, most textbook problems
are based on 1 payment per year. So, if the calculator is set for 12
payments/year and you tell it that there are 8 payments in a problem by
setting N = 8, it assumes that they are made monthly, not annually, so the
answer it calculates would be wrong.
To check the payments per year setting, press 2nd P/Y , and the display will
show the assumed periods per year. If your calculator shows P/Y = 12, then it
is assuming that payments are made on a monthly basis. However, the
majority of the textbook problems assume P/Y = 1. To change the setting to
one payment per year,
press 2nd P/Y 1 ENTER . Now the calculator is set to assume 1 P/Y. To
confirm this setting, press 2nd P/Y . We normally leave the calculator
setting at 1 P/Y. If a problem calls for monthly payments, we adjust the
number of periods and the interest rate as explained later in this tutorial.

Settings: BEGIN and END Mode

An annuity provides payments for a specific number of periods. Those
payments can come at either the beginning or the end of each period, and this
is a very important difference. The calculator can be set to deal with either
payment pattern by switching between BGN and END mode. Most annuities
have end-of-period payments, and if no notation is shown on the display
screen then the calculator is set at END Mode. To toggle between BGN and
END modes, press 2nd BGN 2nd SET CE/C . The letters BGN appear in
the display when the calculator is in BGN mode, but they are absent when in
END mode. We recommend leaving the calculator in END mode, then
switching to BGN when required, and then switching back to END when you are
done. (Repeating these same keystrokes switches the calculator back to END
mode. You no longer see BGN in the calculator display area.)

THE TIME VALUE OF MONEY (TVM) WORKSHEET

1 We understand that TI may change the default setting to 1 payment per year.

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The basic TVM equation has 5 variables, and the calculator has a key for each
of them. The keys are located on the third row, with white notation:
N

I/Y

PV

PMT

FV

If you know any 4 of the 5 variables, the calculator will solve for the fifth, as we
demonstrate in this section. Note that when you enter values for the
variables, they go into the TVM memory, which is continuous, so you must
clear the memory before starting a new calculation. Clear using these
keystrokes: 2nd CLR TVM .
Example 1: Calculating the FV of a lump sum
Whats the FV of $100 after 3 years if the interest rate is 5%?
First, clear by pressing 2nd CLR TVM . This sets all the variables to zero.
Next, enter the following data:
3

I/Y

100

+/ PV

The +/- key changes the 100 to -100.

PMT

You could skip this step, but its safer to enter the 0.

Now press CPT FV to get the answer, $115.76. * indicates a completed

calculation. Note that you must press the CPT key before pressing the
output key, FV . This tells the calculator to compute whatever comes next.
Note also that you cannot type -100 to enter the negative $100; you must
enter 100 and then change its sign to by pressing the +/ key. Typing -100
subtracts 100 from the previous entry and thus leads to an incorrect answer.
Since the PV was entered as a negative number, the FV is automatically
displayed as a positive number.
Example 2: Calculating the PV of a lump sum
What is the PV of $115.76 due in 3 years if the interest rate is 5%?
Clear the calculator with 2nd CLR TVM CE/C and then enter the following
data.
3

I/Y

PMT

115.76

FV

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Pressing CPT PV gives the answer, -$100.00, because if we deposited

$100.00 today in an account that pays 5% per year, it would grow to $115.76
after 3 years.
Example 3: Calculating I/Y
Assume you lend someone $100 today and they must pay you $150 after 10
years. No payments will occur between now and Year 10. What rate of return
would you earn?
10

100

+/ PV

PMT

150

FV

Convert the 100 to -100 to indicate an outlay.

Press CPT I/Y and the calculator provides the earned rate of return, 4.14,
which means 4.14%. Note that the calculator displays 4.14 rather than 0.0414
or 4.14%. Dont clear the calculator; we will use if for the next example.
Example 4: Overriding a value to find a new interest rate, I/Y
Suppose you want to modify the preceding example, lending only $95 but still
receiving $150 after 10 years. What rate of return would you earn on the
modified loan?
If you left data from the preceding example stored in your calculator, you can
override (or replace) the PV of 100. Just enter 95 +/ PV , and when you
press CPT I/Y , you get 4.67%, the new interest rate on the loan. You could
override other variables similarly and thus do what if analyses to see how the
output changes with changes in the inputs.
Example 5: Calculating N
Suppose you currently have $500,000 in an account that is earning 4.5%. You
want to find out how long it will take your account balance to reach
$1,000,000.
4.5

I/Y

500000

+/ PV

PMT

1000000 FV
Press CPT N and the calculator returns 15.75, the number of years before
your balance reaches $1,000,000. Note that the calculator requires you to
enter the interest rate as 4.5 rather than either 0.045 or 4.5%.

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Annuities
Annuities can also be analyzed with the TVM keys. With lump sums, there are
no payments, so PMT = 0. With annuities, we now have payments, so we must
enter a non-zero value for PMT.
Example 6: FV of an ordinary annuity
Whats the FV of an ordinary annuity where we deposit $100 at the end of each
year for 3 years if the interest rate is 5%?
0
|
0

5%

1
|
-100

2
|
-100

3
|
-100

There is no beginning amount, so PV = 0. Thus N, I/Y, PV, and PMT are given,
and we must solve for the FV:
3

I/Y

PV

100

+/ PMT

Now press CPT FV to find the answer, FV = $315.25.

Example 7: FV of an annuity due
If the interest rate is 5%, what is the FV of an annuity due where we deposit
$100 at the beginning of each of the next 3 years?
0 5%
|
-100

1
|
-100

2
|
-100

3
|

After clearing, set the calculator to BGN mode and then enter values for the
input variables:
2nd BGN 2nd SET CE/C
3

I/Y

PV

100

+/ PMT

(to switch to BGN mode)

When you press CPT FV , the answer, $331.01, is displayed, along with the
word BGN. Most text problems have end-of-period payments, so its a good
idea to revert to END mode after a problem: 2nd BGN 2nd SET CE/C .
(Note that you no longer see BGN in the calculator display area.)

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Example 8: PV of an ordinary annuity

Whats the PV of the ordinary annuity discussed in Example 6?
Enter the following data:
3

I/Y

100

+/ PMT

FV

Then, press CPT PV to get $272.32. If the payments were to come at the
beginning of the year (making it an annuity due), leave all the data in the
calculator, and press 2nd
BGN 2nd SET CE/C to set the calculator to BGN mode. Press CPT PV to
find the PV of the annuity due, $285.94. Again, revert to END mode after
finishing this exercise.
Example 9: Finding the payments for an annuity (PMT)
You need $10,000 five years from now. You plan to make 5 end-of-year
payments into an account that pays 6%. How large must each payment be?
What would each payment be if they were made at the beginning of the year?
Since payments are made at the end of each year, make sure the calculator is
set to END mode. N, I/Y, PV, and FV are given, so we solve for the PMT:
5

I/Y

PV

10000 FV
Now, press CPT PMT to get the answer, PMT = -$1,773.96.
To find PMT if the annuity were an annuity due, then we would leave the data
in the TVM register, switch to BGN mode, press CE/C , and then press CPT
PMT to get -$1,673.55.
Example 10: Calculating the number of periods (N)
You need $10,000 to buy a boat. You will deposit $1,200 at the end of each
year in an account that pays 6% interest. How long will it take you to reach
your $10,000 goal?
First, clear the TVM memory and make sure you are in END mode. Then make
these data entries:

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I/Y

PV

1200

+/ PMT

10000 FV
Now press CPT N to find the number of years, 6.96, which you might round
to 7. Notice that the PMT is entered as a negative because you are making a
deposit, while FV is positive because you can withdraw it. Either PMT or FV
must be negativeotherwise, the calculator will produce a nonsensical answer,
in this case -11.90 years. Note too that if the payments occur at the beginning
of each year, you would follow the same procedure, but here your calculator
would be set to BGN mode. The answer would then be 6.63 years.
Example 11: Calculating the interest rate (I/Y)
Continue with the previous example, but now assume you can only save
$1,200 at the end of each year. You still want to accumulate $10,000 by the
end of 5 years. What interest rate would you have to earn to reach this goal?
Here are the keystrokes:
5

PV

1200

+/ PMT

10000 FV
Make sure the calculator is in END mode, and press CPT I/Y . The required
interest rate is 25.78%. If the payments occurred at the beginning of the
years, you would use the same keystrokes, but with the calculator set to BGN
mode, and the answer would be 17.54%.
Example 12: Uneven cash flows: annuity plus a lump sum
Assume that you can buy a security that will make the payments shown on the
following time line. What is the PV of this stream if the interest rate is 12%?
0 12%
|

1
|
100

2
|
100

3
|
100

4
|
100

5
|
100
1,000
1,100

Here we have a 5-year ordinary annuity plus a $1,000 lump sum at the end of
Year 5. The calculator finds the PV of the annuity, the PV of the Year 5 lump
sum payment, and then sums them, using the basic TVM keys as follows:
5

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12

I/Y

100

PMT

1000

FV

Make sure the calculator is in END mode, and press CPT PV to find the PV, $927.90, which shows up as a negative because the PMT and the FV were
inputted as positive numbers.
Example 13: Irregular series of cash flows
Assume that you can buy a security that will make the payments shown on the
following time line. At an interest rate of 12%, what is the PV of the security?
0 12%
|

1
|
100

2
|
300

3
|
300

4
|
300

5
|
500

This problem requires us to use the calculators cash flow register, where we
enter a series of inputs and then perform a calculation based on these inputs.
Each cash flow could be entered one-by-one, but when adjacent cash flows are
equal to one another, as is true for the $300 in years 2, 3, and 4, then it is
more efficient to enter them as a group. We first enter the cash flows, then
tell the calculator that we want to calculate the NPV, then specify the discount
rate, and then tell the calculator to make the calculation.
Begin by pressing 2nd QUIT to leave whatever operation you were in, then
press the
CF key to open the cash flow register, then press 2nd CLR WORK to clear the
cash flow register, and then enter the cash flows as shown below. As you
enter the data, you will see the display prompting you for cash flow values and
the number, or frequency, of times they occur. The frequency prompt assumes
each CF occurs once, so you could accept this number by pressing the down
arrow, but for grouped data, we override the 1 with the number of times the
flow occurs, or with 3 for the $300.
2nd QUIT CF
cash flow
2nd CLR WORK
0
ENTER

Leaves whatever you were doing and Opens the

register.
Clears any previous data in the cash flow register.
Enters CF0 , then moves down to specify CF1 shown

in the
display as C01.

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100

ENTER

Enters CF1 , and the down arrow takes us down to

specify
the number of times this CF occurs, F 01 = with a
prompt
of 1. This is correct, so we accept by pressing
ENTER .
ENTER
300
ENTER
the

Accepts the 1, then moves down to take the next CF.

Enters CF2 as 300 and then moves down to specify
number of times this CF occurs. The prompt is 1, but

that
3

ENTER

is incorrect in this instance.

This tells the calculator that 300 occurs 3 times
and then takes us down to specify the next cash

flow.
500

ENTER

Enters the 500 and takes us down to specify the

ENTER

number of times this cash flow occurs.

Tells the calculator that this CF occurs 1 time and

then
takes us down to specify the next cash flow. There
are no
more cash flows, so we are through entering cash
flows.
Note that with grouped data, the CF subscripts deviate from those on the time
line, e.g., the $500 is CF5 on the time line but CF3 in the CF register. Thus, the
CFs in the register are the unique cash flows in the series.
Once the CFs have been entered as shown above, we tell the calculator to
calculate the NPV.2 It needs an interest rate, so at the prompt we specify 12%.
Here are the keystrokes:
NPV 12 ENTER CPT .
Pressing the NPV key tells the calculator that we want to calculate the NPV. It
then prompts us to enter the interest rate, which in the example is 12%, so we
enter 12. The down arrow and the CPT key complete the entries, and the
answer is $1,016.35.

2 NPV stands for Net Present Value. Our stream has no negative cash flows, but if
there were some negative flows, the calculator would net them out to produce the
NPV. There is a negative flow in the next example.

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Example 14: The Internal Rate of Return (IRR)

Assume that we invest $1,000 today (t = 0) and expect to receive an uneven
set of cash flows in the future. Here is the CF time line:
0 12%
1
|
|
-1000
100

2
|
300

3
|
300

4
|
300

5
|
500

What rate of return will we earn on the $1,000 investment? Here are the
entries:
CF
2nd CLR WORK
1000 +/ ENTER

Enters CF0 and then asks for CF1

100

ENTER

Enters CF1 and asks for its frequency

ENTER

Accepts the 1 and asks for CF2

300

ENTER

Enters CF2 and asks for its frequency

ENTER

Enters the 3 and asks for next cash flow

500

ENTER

Enters CF3 = $500 and asks for its frequency

ENTER

Accepts the 1 and asks for CF4

With the data entered, press IRR CPT to solve for the interest rate, which is
12.55%. So, if we make this investment, we will earn 12.55% on our money.
At 12.55%, the sum of the inflow PVs is equal to the $1,000 investment.
Leave the data in the calculator, and we will show you how to calculate the
NPV without entering new data except for the interest rate. Assuming I/Y =
12%, simply press
NPV 12 ENTER CPT and you will get the NPV, which is $16.35. The
NPV and IRR are used in capital budgeting, and we virtually always calculate
both with a given set of cash flow data. The important point is that you need
to enter the cash flow only once to get both the NPV and the IRR.
Example 15: Effective Annual Rate (EAR, or EFF%)
If interest is paid more than once per year, as is true for most bonds,
mortgages, auto loans, and so forth, then we need to calculate an effective
annual rate for use in TVM calculations. The following equation is used to
convert nominal rates to effective rates:
I

EAR EFF% 1 NOM

M

1,

Here INOM is the stated rate and M is the number of compounding periods per
year. The calculator is programmed to solve this equation. Here is an

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example: What is the EAR (or EFF%) on a bank account that pays a stated (or
nominal) rate of 5% but with semiannual (twice yearly) compounding?
First, you could solve the equation arithmetically:
To begin, set the calculator to 6 decimal places, 2nd FORMAT 6 ENTER .
Next, use the calculators arithmetic keys to solve this equation: EFF% = (1 +
0.05/2)2 1. Here are the keystrokes:
.05 2 =

+ 1 =

x2 1 = which gives 0.050625 = 5.0625%.

Alternatively, you could use the calculators interest conversion function. Clear
the calculators display so it reads 0.000000, then type these keystrokes:
2nd I CONV
worksheet.
5 ENTER
2 ENTER
CPT

This accesses the interest conversion

Enters 5% as the nominal rate and then goes to C/Y,
or compounding periods per year.
This enters 2 as the periods per year.
This calculates the effective rate.

The EAR or EFF% is 5.0625%.

If there had been 12 compounding periods per year, the effective rate would
have been 5.1162%. To see this, press the up arrow twice to get to the C/Y
(compounding periods per year) slot, replace the 2 with 12 by pressing 12
ENTER , and then press the down arrow key twice to get back to the EFF
display, and press CPT to get 5.116190%. Set your calculator back to 2
decimal places by pressing 2nd FORMAT 2 ENTER before beginning the next
example and clear the calculators display so it reads 0.00.
Example 16: PV with semiannual compounding
A $100 lump sum is due in 10 years. If the appropriate discount rate is 5%,
compounded semiannually, what is the PV of the $100?
We can find the PV in two ways. First, with the TVM keys we could use the EFF
% of 5.0625% as calculated above and then enter N = 10, I/Y = 5.0625, PMT =
0, and FV = 100. Then, press CPT PV to find -$61.03. Alternatively, we
could divide the nominal rate by 2 to get the semiannual rate and multiply the
number of years by 2 to get the number of semiannual periods and then
proceed as shown below:
10 x 2 = N

(enters 20 periods for N)

52=

(enters the 2.5% semiannual rate)

I/Y

PMT (because there are no annual payments)

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100

FV

(this is the one payment we will receive as an inflow)

Pressing CPT PV provides the answer, -$61.03. Note that its the same as
the answer found with the EFF% and 10 years rather than 20 semiannual
periods. (Remember, the PV shows up as a negative because PMT and FV
were entered as positive numbers.)
Example 17: Loan amortization
In this example we use the calculator to get the data needed for an
amortization table for a 5-year, 6%, annual payment, loan of $100,000 as
shown in Table 5-4 in the textbook. You should look at that table as you work
through the following calculations.
First, we find the required loan payment. After checking to be sure P/Y is set to
1 payment per year and that you are in END mode, make these entries:
2nd QUIT 2nd CLR TVM
5

I/Y

100000

PV

FV

CPT PMT = -$23,739.64. This is the required annual payment.

Now we need to determine the amount of interest and repayment of principal
in each payment, and the balance at the end of Year 1. Leaving the data in the
calculator, enter these keystrokes:
2nd AMORT 2nd CLR WORK

Display shows P1 = 1.00. This indicates that

we are now working with the first PMT.

BAL = 82,260.36. Balance at the end of Year 1.

PRN = -17,739.64. Amount of principal repaid in Year 1.

INT = -6,000.00. Amount of interest paid in Year 1.

Takes us back to the Period 1 starting point. Could press the down
arrows to
cycle through the results for principal, interest, and remaining balance
again.
CPT

Calculates values for Year 2.

BAL = 63,456.34. Balance at end of Year 2.
PRN = -18,804.02. Amount of principal repaid in Year 2.
INT = -4,935.62. Interest in Year 2.
Takes us back to the Period 2 starting point.

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CPT

Calculates data for Year 3.

BAL = 43,524.08.
Balance at end of Year 3.
PRN = -19,932.26. Amount of principal repaid in Year 3.
INT = -3,807.38. Interest in Year 3.
Takes us back to the Period 3 starting point.

CPT

Calculates data for Year 4.

BAL = 22,395.88.
Balance at end of Year 4.
PRN = -21,128.20. Amount of principal repaid in Year 4.
INT = -2,611.44. Interest in Year 4.
Takes us back to the Period 4 starting point.

CPT

Calculates data for Year 5.

BAL = -0.01.
Balance at end of Year 5. Would round to zero.
PRN = -22,395.89. Amount of principal repaid in Year 5.
INT = -1,343.75. Interest in Year 5.

If you wrote all this out, you would have the Table 5-4 amortization schedule.
The final balance of -0.01 would be rounded to 0.00. More can be done with
the amortization feature, including working with monthly payment loans, but
we refer you to the calculator manual for these applications.

USING THE STATISTICAL FUNCTIONS

This section is tied to Chapter 7, Risk and Rates of Return. The BAII Plus can
also perform several statistical functions. In this tutorial, we will focus on the
mean (or arithmetic average), the standard deviation, and regression analysis.
To begin, note that there are two types of datacomplete population data and
sample data. We have population data if we have information on every
possible data point. For example, if there were 5,000 publicly traded
companies and we knew last years rate of return for each one, then we would
be dealing with population data. However, if we collected data on just 200 of
the 5,000 firms, we would have sample data.
Another example of population data is where you are given a probability
distribution of a particular stocks expected returns. If all possibilities are
included, which means that the probabilities sum to 1, then we have
population rather than sample data. Heres an example of probability data:
Outcome
Terrible
Poor
Expected
Good

Probability
0.10
0.20
0.40
0.20

Return
-18%
-6
12
30

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Excellent

0.10
1.00

42

We generally use statistical analysis in two ways: (1) To get an idea about
something that occurred in the past, like the average rate of return on publicly
owned stocks and the extent to which different firms deviated from that
average. We would use the mean (average) to get an idea of the central
tendency of returns and the standard deviation to get an idea about the
variations about that mean. (2) To predict future outcomes, like the rate of
return on a stock during the coming year. For predictions, we typically rely on
regression analysis.
We are most concerned with the mean (average expected return) and
the standard deviation (which measures the dispersion of possible returns from
the mean). These values can be calculated with the TI BAII Plus as shown
below.
The 12% has the highest probability, the -6% and +30% are next, and
the -18% and the +42% have the lowest probabilities. We can then enter each
return into the calculator in proportion to its probability of its occurrence. You
must select the data-entry portion of the statistics worksheet first, then clear
any previous data entries, and then enter the data. Here are the keystrokes:
2nd DATA

Selects the data-entry portion of the statistics

worksheet.
2nd CLR WORK
Clears any previous data entries.
18 +/- ENTER This enters -18 as the data entry and tells the
calculator there is no Y variable associated with
the X variable. Theres a 10% probability, or 1 in
10, so enter once.
6 +/- ENTER 20% probability, or 2 in 10, so enter twice.
6 +/- ENTER
12 ENTER
40% probability, or 4 in 10, so enter four times.
12 ENTER
12 ENTER
12 ENTER
30 ENTER
20% probability, or 2 in 10, so enter twice.
30 ENTER
42 ENTER
10% probability, or 1 in 10, so enter once.
As you enter the data, the display first shows X01, then Y01 (you press the
down arrow key to indicate that there is no Y variable associated with the X
variable), then X02, etc. for every entry. This tells us how many entries are
stored in the calculator. The last data entry will show X10 before you press the
first of the two arrow keys. Here our probabilities were all divisible by 10 and
hence easy to work with. If the probabilities had been irregular, say 6% for one
return, 13% for another, etc., this procedure would be more trouble than it
would be worth, and it would be easier to just use the formulas to calculate the

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mean and standard deviation. If we have sample data, like annual stock
market returns, each data point has an equal chance of occurring, so we would
just enter each one once.
Once the data have been entered, we can find the mean and standard
deviation as discussed below.
Example 18: Population mean and standard deviation
With the data stored in the calculator as shown above, we can find the
expected return (mean, or average) and the standard deviation () with these
keystrokes:
2nd STAT
2nd CLR WORK
2nd SET

Selects the statistical calculation portion of the

statistics worksheet.
Clears any previous statistical entries. Now LIN
should appear on your calculators display area.
Press these 2 keys 4 times until 1-V (meaning one
variable calculation method) is shown on your
calculators display area.
which gives the mean, or expected, return, 12.00%.
(We entered the percentages as whole numbers so

12.00 appears.)
which gives the standard deviation (x), 17.60%.
(Again, we entered the percentages as whole
numbers, so 17.60 appears.)

Other statistical data can be obtained with these data; however, we leave their
discussion to statistical texts and courses.

Working with sample data

We often work with historical stock market returns, such as the returns shown
below for the market and for Stock Y from 2001 to 2005. This is a sample
because it would be possible to obtain data for many other time periods.
Normally, we would use more observations to increase our confidence in the
results; however, we use a 5 data point example for simplicity.

Year
2001
2002
2003
2004
2005

Return
Market
Stock Y
23.2%
56.8%
-10.1
-23.1
-8.3
-31.0
28.2
32.8
10.1
11.1

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Example 19: Sample mean and standard deviation

What is the mean (average) and standard deviation () of returns on the
market and on Stock Y over the past 5 years?
First, the data must be entered into the calculator. Now, we are entering two
fields of data: market returns and Stock Ys returns. In the calculator, the first
variable entered (market returns) is the independent variable (X) and the
second variable is the dependent variable (Y).
2nd DATA 2nd CLR WORK
23.2
ENTER
56.8

ENTER

10.1

+/- ENTER

23.1

+/- ENTER

8.3

+/- ENTER

31.0

+/- ENTER

28.2

ENTER

32.8

ENTER

10.1

ENTER
2nd STAT

11.1

ENTER

We normally work with the numbers in their raw form and with linear
relationships. However, after you press 2nd STAT you could change to some
nonlinear form, or to work with only one variable, by scrolling through the
options by repeatedly pressing 2nd
SET . For our example, though, stop on LIN because we will do a linear
regression.
The important statistics have now been calculated, and you can see them after
pressing 2nd STAT by using the key to scroll through the output data.
Stop when you get to Y.
n
x

SX
X
return)

SY
Y

= 5.00
= 8.62
= 17.57
= 15.72

(pairs of data)
(mean of X, the market return)
(sample standard deviation of X, the market return)
(population standard deviation of X, the market

= 9.32
= 37.03
= 33.12

(mean of Y, Stock Ys return)

(sample standard deviation of Y, Stock Ys return)
(population standard deviation of Y, Stock Ys return)

Since we are working with sample data, the relevant standard deviations here
are the sample standard deviations, SX and SY . The population standard
deviations (X and Y) are not applicable and mean nothing in this example, so
focus only on the sample standard deviations.

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Linear Regression
Regression analysis shows the relationship between two variables, in this case
the returns on the Market and on Stock Y, and the regression is given in the
form of Y = a + bX. The b term in this equation is the beta coefficient, which
is used in the CAPM to show the relationship between returns on an individual
stock and returns on the market. We can use the data you just entered in the
calculator to find Stock Ys beta. These same procedures can be used for any
simple linear regression.
Example 20: Determining the regression parameters
You presumably kept the data in the calculator and stopped with Y displayed.
If you cleared the data, you must re-enter it and then scroll down to Y . You
can now use the key to scroll to the next term after Y , which is the Yintercept, a = -7.74, and then to the next term, the beta (or slope) coefficient,
b = 1.98.
a = the Y-intercept = -7.74%.
b = the beta coefficient = 1.98.
Therefore, the regression line is:
Stock Ys return = -7.74% + 1.98 (Market return).
Based on this equation, if the broad stock market has a return of 10% next
year, then Stock Y should have a return of 12.06%:
Stock Ys return = -7.74% + 1.98(Market return) = -7.74% +19.80% = 12.06%.
Here Y is the dependent variable and X is the independent variable, so we are
saying that Stock Xs returns depend on what happens to the broad stock
market. We are also interested in the strength of the relationship between the
X and Y variables, and this is measured by the correlation coefficient, which
can be seen by scrolling down one more time by using the key. The
correlation coefficient is seen to be r = 0.94, indicating a strong relationship.
r = the correlation coefficient = 0.94.
In a simple regression (which means that the dependent variable is presumed
to be determined by just one independent variable), the R2 of the regression,
which is just the correlation coefficient squared, tells us the percentage of the
variation in Stock Ys returns that are caused by swings in the Markets returns:
R2 = (r)2 = (0.94)2 = 0.88.
Finally, note that the TI BAII Plus cannot do multiple regressions, where there
are two or more independent variables.