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FACTORS AFFECTING INVESTORS PREFERENCE FOR MUTUAL FUNDS IN INDIA 1
IBS HYDERABAD
Submitted to: Submitted by:
Dr. P. Sashikala Prasoon Thakur-09BSHYD0577
Angela Thomas-09BSHYD0096
U Nataraj-09BSHYD0935
Nipun Malhotra-09BSHYD0524
Subrat Jain-09BSHYD0860
REPORTON
INVESTORS PREFERENCEFOR MUTUAL FUNDS
IN INDIA
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IBS HYDERABAD
CONTENTS
ntroduction
Objective..Literature Study..
ethodologySample Selection.
nalysis of the Data CollectedData Distribution..
Conclusion
eferences
3
5
6
8
10
26
27
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INTRODUCTION
The project contains the brief description of the mutual fund industry in general and its
references. A survey was conducted to gather primary data to judge the factors that influence
investors before they invest in any of the investment tools and thus the first part of the paper
scrutinizes the investor's perception and analyzes the relation between the features of the products and
the investors' requirements. With this back ground an attempt has been made in this paper to
categorize investors based on various demographic factors such as age, sex, income level and occupation.
It is widely believed that MF is a retail product designed to target small investors, salaried people
and others who are intimidated by the stock market but, nevertheless, like to reap the benefits of
stock market investing. At the retail level, investors are unique and are a highly heterogeneous group.
Hence, designing products that are customer tailored to the different needs is important. Currently
there are more than 2500 schemes with varied objectives and AMCs are competing against eachother by Launching new products or repositioning old ones. MF industry today is facing competition not
only from within the industry but also from other financial products that provide many of the same
economic functions as mutual funds but are not strictly MFs. Thus the paper attempts to study the
factors influencing the fund/scheme selection behavior of Retail Investors who invest in Mutual
funds.
INVESTMENTS
Savings form an important part of the economy of any nation. With the Savings invested in various
options available to the people, the money acts .As the driver for growth of the country. Indian financial
scene too presents a Plethora of avenues to the investors. Though certainly not the best or Deepest of
markets in the world, it has reasonable options for an ordinary Man to invest his savings.
An investment can be described as perfect if it satisfies all the needs of all Investors. So, the starting
oint in searching for the perfect investment would be to examine investor needs. If all those needs are
met by the investment, then that investment can be termed the perfect investment.
Most investors and advisors spend a great deal of time understanding the merits of the thousandsof investments available in India. Little time however, is spent understanding the needs of the investor
and ensuring that the most appropriate investments are selected for him.
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FACTORS AFFECTING INVESTORS PREFERENCE FOR MUTUAL FUNDS IN INDIA 4
IBS HYDERABAD
MUTUAL FUNDS
Mutual Funds over the years have gained immensely in their popularity. Apart from the
many advantages that investing in mutual funds provide like diversification, professional
management, the ease of investment process has proved to be a major enabling factor. However,
with the introduction of Innovative products, the world of mutual funds nowadays has a lot to
offer to its investors. With the introduction of diverse options, investors needs to choose a mutual
fund that meets his risk acceptance and his risk capacity levels and has similar investment
objectives as the investor.
With the plethora of schemes available in the Indian markets, an investors needs to evaluate and
consider various factors before making an investment decision. Since not everyone has the time
or inclination to invest and do the analysis himself, the job is best left to a professional. Since
Indian economy is no more a closed market, and has started integrating with the worldmarkets, external factors which are complex in nature affect us too. Factors such as an increase in
short-term US interest rates, the hike in crude prices, or any major happening in Asian market
have a deep impact on the Indian stock market. Although it is not possible for an individual
investor to understand Indian companies and investing in such an environment, the
process can become fairly time consuming. Mutual funds (whose fund managers are paid to
understand these issues and whose Asset Management Company invests in research) provide an
option of investing without getting lost in the complexities.
Most importantly, mutual funds provide risk diversification: diversification of a portfolio is
amongst the primary tenets of portfolio structuring, and a necessary one to reduce the levelof risk assumed by the portfolio holder. Most of the investors are not necessarily well qualified
to apply the theories of portfolio structuring to their holdings and hence would be better
off leaving that to a professional. Mutual funds represent one such option.
DEFINITION-A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through these
investments and the capital appreciation realized are shared by its unit holders in proportionto the number of units owned by them. Thus a Mutual Fund is the most suitable investment for
the common man as it offers an opportunity to invest in a diversified, professionally
managed basket of securities at a relatively low cost.
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FACTORS AFFECTING INVESTORS PREFERENCE FOR MUTUAL FUNDS IN INDIA 5
IBS HYDERABAD
OBJECTIVE
To categorize investors as being inclined towards investment products based on certaincharacteristic such as age, occupation, annual income and objective of Investment.
In order to examine the issues raised above, this paper has the following objectives before it:1) To understand the savings revenue preference among MF investors
2) To identify the features the investors look for in Mutual Fund products
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LITERATURE STUDY
Mutual funds are a topic which is of enormous interest not only to researchers all over the
world, but also to investors. Mutual Funds as a medium-to-long term investment option arepreferred as a suitable investment option by investors. However, with several market entrants the
question is the choice of mutual fund. The study focuses on this problem of mutual fund
selection by investors. Though the investment objectives define investors preference among
fund types (balanced, growth, dividend etc.) the choice of fund based on a sponsors reputation
remains to be probed. Investment performance of mutual funds irrespective of whether they are
public-sector sponsored or Private-sector sponsored, researchers do not investigate the influence
of portfolio characteristics and the variable effect of diversification on mutual fund performance.
LITERATURE on mutual fund performance evaluation is enormous. A few research studies that
have influenced the preparation of this paper substantially are discussed in this section.
Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.
Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has
suggested a new predictor of mutual fund performance, one that differs from virtually all those
used previously by incorporating the volatility of a fund's return in a simple yet meaningful
manner.
Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual
funds. This paper uses a technique called conditional performance evaluation on a sample of
eighty-nine Indian mutual fund schemes.Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to
randomly select conventional funds of similar net assets to investigate differences in
characteristics of assets held, degree of portfolio diversification and variable effects of
diversification on investment performance. The study found that socially responsible funds do
not differ significantly from conventional funds In terms of any of these attributes.
Based on the diversity of studies made, we intend to concentrate on one aspect of it. By the end
of the project period we intend to reach a point where we have a better understanding of mutual
funds and investor preferences, also have clarity of markets, the risk and return aspect and other
factors, in the process.
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This project has been influenced by the research we made, the feedback, diverse ideas and
opinions we got which not only helped us with the project but also helped us realize the diversity
in behavior and approach in dealing with mutual funds and other securities based on various
factors.
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METHODOLOGY
In financial markets, "expectations" of the investors play a vital role. They influence the price of the
securities; the volume traded and determines quite a lot of things in actual practice. These expectations'
Of the investors are influenced by their "perception" and humans generally relate perception to action.
The objective of the survey was to categorize investors as being inclined towards investment
roducts based on certain characteristic such as sex, age, occupation, annual income etc. In
addition the time horizon of investment and the real need/purpose of investment were studied and
Categorized based on the above demographic factors.
It was also intended to examine the different intrinsic factors of a mutual fund scheme and different
environmental forces that motivate a investor to choose a particular mutual fund scheme.
MARKET SURVEY:
ESIGNING A QUESTIONAIRE
To understand the savings avenue preference, scheme preference, time horizon for investment and
objectives for investment in MFs, and to identify the information sources influencing scheme selection,
and the preferred mode of communication, a questionnaire was designed and
the respondents were asked to rank their preferences on a ranking scale. The ranks were
ascertained by obtaining the weighted mean value of the responses.
To identify the factors that influence the investors fund/scheme selection, 4 variables were identified
through evidence from past research. Based on theory, past research, and personal judgment, the
factors that could influence the investors in their selection of Mutual funds/schemes.
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Age Distribution in Sample Occupational Distribution in Sample Annual Income Distribution in Sample Objective for Investment in Mutual Fund
AMPLE SELECTION
Survey was conducted on 75 investors. The survey was conducted during July-Aug 2009.
The required data was collected through a questionnaire which was Administered through different
techniques i.e. - through telephone, emails.
OBJECTIVE
Safety
Liquidity
Tax Benefit
Dividend
Capital Appreciation
RANK
1
4
3
2
5
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ANALYSIS OF THE DATA COLLECTED
ANALYSIS TOOLS
Here we are using two tools for analysis of the data collected. The objective is to determine
whether Mutual funds are preferred by the investors. The two tools involved are:
CHI-SQUAREA chi-square test (also chi-squared or 2 test) is any statistical hypothesis test in
which the sampling distribution of the test statistic is a chi-square distribution when
the null hypothesis is true, or any in which this is asymptotically true, meaning that
the sampling distribution (if the null hypothesis is true) can be made to approximate a
chi-square distribution as closely as desired by making the sample size large enough.
ANOVAIn statistics, analysis of variance (ANOVA) is a collection of statistical models, and their
associated procedures, in which the observed variance is partitioned into components due
to different explanatory variables, usually called factors in Design of experiments. The
initial techniques of the analysis of variance were pioneered by the statistician and
geneticist R. A. Fisher in the 1920s and 1930s, and are sometimes known as Fisher'sANOVA or Fisher's analysis of variance, due to the use of Fisher's F-distribution as part
of the test of statistical significance.
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DATA Distribution for different Investments in India
Age WiseDistribution
Age
Mutual
Fund
Fixed
Deposit Life Insurance
Postal
Service
s
Stock
s
Provident
Fund
below 30 9 0 1 0 4 2
30-40 6 4 2 1 3 3
40-50 5 3 3 1 3 5
Above 50 5 1 6 3 2 3
Total 25 8 12 5 12 13
Occupation Wise Distribution
Occupation
Mutual
Fund
Fixed
Deposit Life Insurance
Postal
Service
s
Stock
s
Provident
Fund
Businessma
n 8 2 4 0 6 0
Salaried 13 4 1 2 4 9
Retired 4 2 7 3 2 4
Total 25 8 12 5 12 13
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Annual Income Wise Distribution
Income
Mutual
Fund
Fixed
Deposit Life Insurance
Postal
Service
s
Stock
s
Provident
Fund
400000 5 2 5 0 4 7
Total 25 8 12 5 12 13
Objective for Investment
Objective
Mutual
Fund
Fixed
Deposit
Life
Insurance
Postal
Services Stocks
Provident
Fund
Tax Benefit:10 0 3 0 3 7Capital
Appreciation: 8 0 0 0 4 0
Return 5 3 4 2 2 2
Liquidity 0 0 0 0 3 0
Safety 2 5 5 3 0 4
Total 25 8 12 5 12 13
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(1) Age Wise Distribution
(a)Calculation for Chi-Square
H0 : Preference for type of investment does not depend on age
H1 : Preference for type of investment does depend on age
Age
Mutual
Fund
Fixed
Deposit
Life
Insurance
Postal
Services Stocks
Provident
Fund Total
below
30 9 0 1 0 4 2 1630-40 6 4 2 1 3 3 19
40-50 5 3 3 1 3 5 20
Above
50 5 1 6 3 2 3 20
Total 25 8 12 5 12 13 75
Row Column f0
fe =
RT*CT/n f0 - fe
(f0 -
fe)2 (f0 - fe)
2/fe
1 1 9 5.33 3.67 13.444 2.521
1 2 0 1.71 -1.71 2.913 1.707
1 3 1 2.56 -1.56 2.434 0.951
1 4 0 1.07 -1.07 1.138 1.067
1 5 4 2.56 1.44 2.074 0.810
1 6 2 2.77 -0.77 0.598 0.216
2 1 6 6.33 -0.33 0.111 0.018
2 2 4 2.03 1.97 3.894 1.921
2 3 2 3.04 -1.04 1.082 0.356
2 4 1 1.27 -0.27 0.071 0.056
2 5 3 3.04 -0.04 0.002 0.001
2 6 3 3.29 -0.29 0.086 0.026
3 1 5 6.67 -1.67 2.778 0.417
3 2 3 2.13 0.87 0.751 0.352
3 3 3 3.20 -0.20 0.040 0.013
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3 4 1 1.33 -0.33 0.111 0.083
3 5 3 3.20 -0.20 0.040 0.013
3 6 5 3.47 1.53 2.351 0.678
4 1 5 6.67 -1.67 2.778 0.417
4 2 1 2.13 -1.13 1.284 0.602
4 3 6 3.20 2.80 7.840 2.450
4 4 3 1.33 1.67 2.778 2.083
4 5 2 3.20 -1.20 1.440 0.450
4 6 3 3.47 -0.47 0.218 0.063
2
17.268
Degrees of freedom = (4-1) x (6-1) = 15
For = 0.05 , tabulated Chi-Square = 24.996
Hence, we accept H0which says that preference for type of investment does not depend on
age.
(b) Calculation for ANOVA
H01: 1= 2= 3=..= i
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ANOVA
Source of
Variation SS df MS F P-value F critRows 1.791667 3 0.597222 0.2015 0.893727 3.287382
Columns 58.375 5 11.675 3.939082 0.017598 2.901295
Error 44.45833 15 2.963889
Total 104.625 23
Conclusion:
(i)Row Wise
As Fcritical is greater than Fcomputedtherefore H01 is accepted.
(ii)Column Wise
As Fcritical is less than Fcomputedtherefore H12 is accepted.
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(2)Occupation Wise
Distribution
Occupation
Mutual
Fund
Fixed
Deposit
Life
Insurance
Postal
Services Stocks
Provident
Fund Total
Businessman 8 2 4 0 6 0 20
Salaried 13 4 1 2 4 9 33
Retired 4 2 7 3 2 4 22
Total 25 8 12 5 12 13 75
(a)Calculation for Chi-Square
Ho:Preference for Type of Investment and Occupation are independent
H1:Preference for Type of Investment is dependent on Occupation
a=0.05
Degrees of
Freedom=
(Total rows-1)*(Total
Columns-)
(3-1)*(6-1)
10
Row Column f0
Row
Total(RT)
Column
Total(CT) fe=(RT*CT)/n
((fo-
fe)^2)/fe
1 1 8 20 25 6.666667 0.2666667
1 2 2 20 8 2.133333 0.0083333
1 3 4 20 12 3.2 0.2
1 4 0 20 5 1.333333 1.3333333
1 5 6 20 12 3.2 2.45
1 6 0 20 13 3.466667 3.46666672 1 13 33 25 11 0.3636364
2 2 4 33 8 3.52 0.0654545
2 3 1 33 12 5.28 3.4693939
2 4 2 33 5 2.2 0.0181818
2 5 4 33 12 5.28 0.310303
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2 6 9 33 13 5.72 1.8808392
3 1 4 22 25 7.333333 1.5151515
3 2 2 22 8 2.346667 0.0512121
3 3 7 22 12 3.52 3.4404545
3 4 3 22 5 1.466667 1.6030303
3 5 2 22 12 3.52 0.6563636
3 6 4 22 13 3.813333 0.0091375
2 21.108159
Tabulated Value at 0.05 Significance Level= 18.307
Computed value= 21.108
Here the Computed Value comes out to be greater than the Tabulated value hence theNull Hypothesis is rejected.
Conclusion: H1 is accepted i.e. Preference for Type of Investment is dependent
On Occupation.
(b) Calculation for ANOVA
ANOVA: Two-Factor Without
Replication
H01: 1= 2= 3=..= i
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SUMMARY Count Sum Average Variance
Row 1 6 20 3.333333 10.66667
Row 2 6 33 5.5 21.1
Row 3 6 22 3.666667 3.466667
Column 1 3 25 8.333333 20.33333
Column 2 3 8 2.666667 1.333333
Column 3 3 12 4 9
Column 4 3 5 1.666667 2.333333
Column 5 3 12 4 4
Column 6 3 13 4.333333 20.33333
ANOVA
Source of
Variation SS df MS F P-value F crit
Rows 16.33333 2 8.166667 0.830508 0.463786 4.102821Columns 77.83333 5 15.56667 1.583051 0.250591 3.325835
Error 98.33333 10 9.833333
Total 192.5 17
Conclusion:
(i)Row Wise
As Fcritical is greater than Fcomputedtherefore H01 is accepted.
(ii)Column Wise
As Fcritical is greater than Fcomputedtherefore H02 is accepted.
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(3)Annual Income Wise
Distribution
Income
Mutual
Fund
Fixed
Deposit
Life
Insurance
Postal
Services Stocks
Provident
Fund Total
400000 5 2 5 0 4 7 23
Total 25 8 12 5 12 13 75
(a)Chi-
squareWe have to check if a person's choice is affected by the income of that person or not.
This can be checked using chi-square.
Ho: Income and preference are independent
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3 2 4 2.56 1.44 2.0736 0.81
3 3 5 3.84 1.16 1.3456 0.35042
3 4 0 1.6 -1.6 2.56 1.6
3 5 5 3.84 1.16 1.3456 0.35042
3 6 3 4.16 -1.16 1.3456 0.32346
4 1 5 7.666667 -2.6667 7.111111 0.92754
4 2 2 2.453333 -0.4533 0.205511 0.08377
4 3 5 3.68 1.32 1.7424 0.47348
4 4 0 1.533333 -1.5333 2.351111 1.53333
4 5 4 3.68 0.32 0.1024 0.02783
4 6 7 3.986667 3.01333 9.080178 2.27764
2 50.1434
Degrees of freedom=(row-1)(column-1)=(4-1)(6-1)=3*5=15
therefore, from the table, the value is 24.996
Here, the calculated value is much higher than the table
value.
i.e., the value lies outside the acceptance region so we reject the null hypothesis
and accept the alternate hypothesis that the preference and income are dependent on each other.
(b) Calculation for ANOVA
H01: 1= 2= 3=..= i
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ANOVA: Two-Factor Without Replication
SUMMARY Count Sum Average VarianceRow 1 6 9 1.5 3.5
Row 2 6 19 3.166667 15.36667
Row 3 6 24 4 5.6
Row 4 6 23 3.833333 6.166667
Column 1 4 25 6.25 14.25
Column 2 4 8 2 2.666667
Column 3 4 12 3 6
Column 4 4 5 1.25 6.25
Column 5 4 12 3 3.333333Column 6 4 13 3.25 6.916667
ANOVA
Source of
Variation SS df MS F P-value F crit
Rows 23.45833 3 7.819444 1.237363 0.330973 3.287382
Columns 58.375 5 11.675 1.847473 0.163932 2.901295
Error 94.79167 15 6.319444
Total 176.625 23
Conclusion:
(i)Row Wise
As Fcritical is greater than Fcomputedtherefore H01 is accepted.
(ii)Column Wise
As Fcritical is greater than Fcomputedtherefore H02 is accepted.
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(4)Objective for
Investment
Objective
Mutual
Fund Fixed Deposit
Life
Insurance
PostalService
s Stocks
Provident
Fund Total
Tax Benefit:
10 0 3 0 3 7 23
Capital
Appreciation:
8 0 0 0 4 0 12Return 5 3 4 2 2 2 18
Liquidity 0 0 0 0 3 0 3
Safety 2 5 5 3 0 4 19
Total 25 8 12 5 12 13 75
(a)Calculation for Chi-Square
Ho:Preference for Type of Investment and Objective are independent
H1:Preference for Type of Investment is dependent on Objective
a=0.05
Degrees of Freedom= (Total rows-1)*(Total Columns-1)
(5-1)*(6-1)
20
Row Column
Row Total
(RT)
Column
Total(CT) fo fe
(fo-
fe)^2/fe
1 1 23 25 10 7.67 0.71
1 2 23 8 0 2.45 2.45
1 3 23 12 3 3.68 0.13
1 4 23 5 0 1.53 1.53
1 5 23 12 3 3.68 0.13
1 6 23 13 7 3.99 2.28
2 1 12 25 8 4.00 4.00
2 2 12 8 0 1.28 1.28
2 3 12 12 0 1.92 1.92
2 4 12 5 0 0.80 0.80
2 5 12 12 4 1.92 2.25
2 6 12 13 0 2.08 2.08
3 1 18 25 5 6.00 0.17
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3 2 18 8 3 1.92 0.61
3 3 18 12 4 2.88 0.44
3 4 18 5 2 1.20 0.53
3 5 18 12 2 2.88 0.27
3 6 18 13 2 3.12 0.40
4 1 3 25 0 1.00 1.00
4 2 3 8 0 0.32 0.32
4 3 3 12 0 0.48 0.48
4 4 3 5 0 0.20 0.20
4 5 3 12 3 0.48 13.23
4 6 3 13 0 0.52 0.52
5 1 19 25 2 6.33 2.96
5 2 19 8 5 2.03 4.36
5 3 19 12 5 3.04 1.26
5 4 19 5 3 1.27 2.37
5 5 19 12 0 3.04 3.04
5 6 19 13 4 3.29 0.15
2
51.88
Tabulated Value at 0.05 Significance Level= 31.41
Computed value= 51.8774
Here the Computed Value comes out to be greater than the Tabulated value hence the NullHypothesis is rejected
To conclude H1 is accepted i.e. Preference for Type of Investment is dependent on Objective
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(b) Calculation for ANOVA
H01: 1= 2= 3=..= i
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Conclusion:
(i)Row Wise
As Fcritical is greater than Fcomputedtherefore H01 is accepted.
(ii)Column Wise
As Fcritical is greater than Fcomputedtherefore H02 is accepted.
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CONCLUSION
As per the calculation, the preference for investment type is affected/not affected by different
variables as follows:
As per Chi-Square:
Factor Effect
Age No
Occupation Yes
Annual Income Yes
Objective of Investment Yes
It is evident from the above analysis the choice of investment depends upon all the factors except
Age.
As per ANOVA:The Calculations of ANOVA reveal that there is Homogeneity within the whole set of data withrespect to type of investment and annual income, type of investment and objective of investment
and type of investment and occupation of the investor except for the type of investment and agefactor.
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REFERENCES
1. www.moneycontrol.com2. www.amfiindia.com
3. www.wikepedia.com
4. www.investopedia.com
5. Statistics for management (Pearson) by Richard I.Levin and David S.Rubin