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CAIIB -Financial Management

Module A -Quantitative
Techniques and Business
Mathematics
Madhav K Prabhu
M.Tech, MIM, PMP, CISA, CAIIB, CeISB, MCTS, DCL
Agenda
Time Value of Money
Bond Valuation Theory
Sampling
Regression and Correlation



Time Value of Money
Objectives
What do we mean by Time value of money
Present Value, Discounted Value, Annuity
Time Value of Money
What is Time Value of Money?
Future Value
Present Value
Future Value: Compounding:





Principal P 20,000 20,000 20,000
Interest Rate i 10% 10% 10%
No. of Years n 1 2 3
Future Value FV 22,000 24,200 26,620
Interest Amount 2,000 2,200 2,420
Assuming Compounding Done Annually
How would you
do
Compounding?
Compounding
Compounding Formula

What if compounding is done on monthly basis?
n
n
i P FV ) 1 ( * + =
t n
n
t
i
P FV
*
1 *
|
.
|

\
|
+ =
Principal P 20,000 20,000 20,000
Interest Rate i 10% 10% 10%
No. of Years n 1 2 3
Times Compounding in a Year t 12 12 12
Maturity Value FV 22,094 24,408 26,964
Interest Amount 2,094 4,408 6,964
Assuming Compounding Done Monthly
Compounding Exercise
Exercise:
Prepare a table showing compounding as per
following conditions:
Rate of Interest - 5%, 12% and 15%
Compounding 2 & 4 times in a year
Principal Rs.100,000/-
Discounting
Present Value
You have an option to receive Rs. 1,000/- either today or after
one year. Which option you will select? Why?
Decision will depend upon the present value of money; which
can be calculated by a process called Discounting (opposite of
Compounding)
Interest Rate and Time of Receipt of money decide Present
Value
What is the present value of Rs. 1,000/- today and a year later?
To compute Present Value?
Discounting contd
Formula to find Present Value of Future Cash Receipt


Where PV = Present Value, P = Principal, i = Rate of Interest, n = Number
of Years after which money is received
Assuming Rate of Interest is 10%, value of Rs. 1,000/- to be received
after 1 year will be,


Whereas the value of money to be received today will be Rs. 1,000/-
( )
n
n
i
P
PV
+
=
1
( )
1
10 1
1000
09 909
%
.
+
=
What if you were to choose between:
a. Receive Rs. 1,000/- every year for 3 years, OR
b. Receive Rs. 2,500/- today? (assume 10% annual interest rate)
Discounting of a Series contd
How discounting is done for a series of cashflow? e.g.
Receive Rs. 1,000/- at the end of every year for 3 years OR
Receive Rs. 2,500/- today
Assume Rate of Interest @10%
Principal P 20,000 20,000 20,000
Interest Rate i 10% 10% 10%
Year n 1 2 3
Present Value PV 18,181.82 16,528.93 15,026.30
Assuming Discounting Done Annually
I f cashflow was to occur every 6 months instead of 1 year, what impact
it will have on Present Value?
Periodic Discounting
What if the receipts are over six months
interval ? Find Present Value of the money
receipts


Periodic Discounting Formula

Receive Rs. 1,000/- at the end of every 6 months for 1-1/2 years OR
Receive Rs. 2,600/- today
Assume Rate of interest @10%
n
t
i
P
PV
|
.
|

\
|
+
=
1
Where, P = Principal, i = Rate of
Interest,
t = Times Payments made in a Year,
n = n
th
Period (in this case it is half
year)
Periodic Discounting Formula
Principal P 1,000 1,000 1,000
Interest Rate i 10% 10% 10%
HY n 1 2 3
Times Discounting in a Year t 2 2 2
Discount Factor DF 0.9524 0.9070 0.8638
Present Value PV=P*DF 952.38 907.03 863.84
Sum of Present Value
Assuming Discounting Done Semi-Annually
2,723.25
3 2 1
2
% 10
1
1000
2
% 10
1
1000
2
% 10
1
1000
25 . 2723
|
.
|

\
|
+
+
|
.
|

\
|
+
+
|
.
|

\
|
+
=
Expressed mathematically, the equation will look like:
Generically expressed,
the formula is:



Here, N = 3

=
|
.
|

\
|
+
=
N
n
n
n
t
i
x
SUMof PV
1
1
Charting of Cashflow
For any financial proposition prepare a chart of cashflow: e.g.

Invested in 10% Bonds 01-Jan-04 (1,000) Outflow
Interest received 30-Jun-04 50 Inflow
Interest received 31-Dec-04 50 Inflow
New Bond Purchased from
Open Market
31-Dec-04 (1,020) Outflow
Interest received 30-Jun-05 100 Inflow
Sold Bond in Open Market 30-Jun-05 2,050 Inflow
Timeline
01.01.0
4
Invested in Bonds
(1,000)
30.06.04
Interest Received +50
31.12.04
Interest Received + 50
New Bond Purchased (1,020)
Net ( 970)
30.06.05
Interest Received + 100
Sold Bond +2,050
Total +2,150
Net Present Value
Net Present Value means the difference between the PV of Cash Inflows &
Cash Outflows
How do you compute NPV?
Prepare Cashflow Chart
Net off Inflow & Outflow for each period separately
If Inflow >Outflow, positive cash
If Inflow <Outflow, negative cash
Find present values of Inflows & Outflows by applying Discount Factor (or
Present Value Factor)
NPV =(PV of Inflows) LESS (PV of Outflows); Result can be +ve OR -ve
Continuing with our example of Bond Investment:
Timeline
01.01.0
4
Invested in Bonds
(1,000)
30.06.04
Interest Received +50
31.12.04
Interest Received + 50
New Bond Purchased (1,020)
Net ( 970)
30.06.05
Interest Received + 100
Sold Bond +2,050
Total +2,150
Inflow
Outflow
NPV contd
If Cashflows are discounted at say 10%, the sum of PV is 25.05, a positive
number & therefore the IRR has be higher than 10% to make Net Present
Value to zero
What is I RR?
Description Date Amount In / Out PV Outflow PV Inflow
Invested in 10% Bonds 01-Jan-04 (1,000) Outflow (1,000.00)
Interest received 30-Jun-04 50 Inflow 47.62
Interest received 31-Dec-04 50 Inflow 45.35
New Bond Purchased from
Open Market
31-Dec-04 (1,020) Outflow (925.17)
Interest received 30-Jun-05 100 Inflow 86.38
Sold Bond in Open Market 30-Jun-05 2,050 Inflow 1,770.87
Sum (1,925.17) 1,950.22
Net Present Value 25.05
How these values are arrived at?
Internal Rate of Return (IRR)
Definition: The Rate at which the NPV is Zero. It can also be termed
as Effective Rate
If we want to find out IRR of the bond investment cashflow:
Description Date
Composit
Flow
Invested in Bonds 01-Jan-04 (1,000)
Interest received 30-Jun-04 50
Interest received + New Bond
Purchased
31-Dec-04 (970)
Interest received + Sold Bond 30-Jun-05 2,150
11.38% IRR of entire cashflow
IRR Contd
To prove that at IRR of 11.38% the NPV of Investment Cashflow
is zero, see the formula & table:



3 2 1 0
2
% 38 . 11
1
2150
2
% 38 . 11
1
970
2
% 38 . 11
1
50
2
% 38 . 11
1
1000
0
|
.
|

\
|
+
+
|
.
|

\
|
+

+
|
.
|

\
|
+
+
|
.
|

\
|
+

=
Description Date
Composit
Flow
PV Factor
NPV at
IRR
Invested in Bonds 01-Jan-04 (1,000) 1.00000 (1,000.00)
Interest received 30-Jun-04 50 0.94615 47.31
Interest received +
New Bond Purchased
31-Dec-04 (970)
0.89520
(868.34)
Interest received +
Sold Bond
30-Jun-05 2,150
0.84699
1,821.04
11.38% Sum of PVs 0.00 IRR of entire cashflow
IRR - Additional Example
You buy a car costing Rs. 600,000/-
Banker is willing to finance upto Rs. 500,000/-
The loan is repayable over 3 years, in Equated
Monthly Installments (EMI) of Rs. 15,000/-
Installments are payable In Arrears
What is the IRR?
How do you express this mathematically? What are
the values of each component in the formula?
What will be the impact on IRR if the EMIs are
payable In Advance?
Can we use IRR for computing Interest & Principal
break-up?
IRR - Additional Example contd
Plot the cashflow:
EMI in Arrears


01.01.200
6
+500,000 01.02.200
6
-15,000
01.03.200
6
-15,000

01.04.200
6
-15,000
01.11.200
8
-15,000
01.12.200
8
-15,000

Begin
End
Value of i
to be
determined

=
+
=
|
.
|

\
|
36
1 n
n
12
i
1
n
15,000
500,000
Formula
Expression
Values in Expression

=
|
.
|

\
|
+
=
N
n
n
n
t
i
x
P
1
1
1 2 3 35 36
IRR - Additional Example contd
Plot the cashflow:
EMI in Advance


01.01.200
6
+500,000 01.02.200
6
-15,000
01.03.200
6
-15,000

01.04.200
6
-15,000
01.12.200
8
-15,000
01.01.200
9
-15,000

Begin
End
Value of i
to be
determined

=
+
=
|
.
|

\
|
36
2 n
n
12
i
1
n
15,000
1
15,000 - 500,000
Formula
Expression
Values in Expression

=
|
.
|

\
|
+
=
N
n
n
n
t
i
x
X P
2
1
1
1 2 3 35 36
-15,000
BOND VALUATION
Objectives
Distinguish bonds coupon rate, current
yield, yield to maturity
Interest rate risk
Bond ratings and investors demand for
appropriate interest rates
Bond characteristics
Bond - evidence of debt issued by a body
corporate or Govt. In India, Govt predominantly
A bond represents a loan made by investors to the
issuer. In return for his/her money, the investor
receives a legaI claim on future cash flows of the
borrower.
The issuer promises to:
Make regular coupon payments every period until the bond
matures, and
Pay the face/par/maturity value of the bond when it matures
How do bonds work?
If a bond has five years to maturity, an Rs.80 annual coupon, and a
Rs.1000 face value, its cash flows would look like this:
Time 0 1 2 3 4 5
Coupons Rs.80 Rs.80 Rs.80 Rs.80 Rs.80
Face Value 1000
Market Price Rs.____
How much is this bond worth? It depends on the level of current
market interest rates. If the going rate on bonds like this one is 10%,
then this bond has a market value of Rs.924.18. Why?
n
r
F I
r
I
r
I
PV
bond a for formula General
) 1 ( ) 1 ( 1
:
2
+
+
+ +
+
+
+
=
5 5 4 3 2
) 10 . 0 1 (
1000
) 10 . 0 1 (
80
) 10 . 0 1 (
80
) 10 . 0 1 (
80
) 10 . 0 1 (
80
10 . 0 1
80
) (
+
+
+
+
+
+
+
+
+
+
+
= ~ bond of price PV
Coupon payments
Face value Maturity
Annuity component
Lump sum
component
Bond prices and Interest Rates
Interest rate same as coupon rate
Bond sells for face value
Interest rate higher than coupon rate
Bond sells at a discount
Interest rate lower than coupon rate
Bond sells at a premium

Bond terminology
Yield to Maturity
Discount rate that makes present value of
bonds payments equal to its price
Current Yield
Annual coupon divided by the current
market price of the bond
Current yield = 80 / 924.18 = 8.66%

Rate of return
Rate of return
= Coupon income + price change
----------------------------------------
Investment
e.g. you buy 6 % bond at 1010.77 and sell next
year at 1020
Rate of return = 60+9.33/1010.77 = 6.86%

Risks in Bonds
Interest rate risk
Short term v/s long term
Default risk
Default premium
Bond pricing
The following statements about bond pricing are always true.
Bond prices and market interest rates move in opposite
directions.
When a bonds coupon rate is (greater than / equal to / less
than) the markets required return, the bonds
market value will be (greater than / equal to / less than) its par
value.
Given two bonds identical but for maturity, the price of the
longer-term bond will change more (in percentage terms) than that
of the shorter-term bond, for a given change in market interest
rates.
Given two bonds identical but for coupon, the price of the
lower-coupon bond will change more (in percentage terms) than
that of the higher-coupon bond, for a given change in market
interest rates.

SAMPLING
Objectives
Distinguish sample and population
Sampling distributions
Sampling procedures
Estimation data analysis and
interpretation
Testing of hypotheses one sample data
Testing of hypotheses two sample data
Pouplation and Sample
Population Sample
Definition Collection of items being
considered
Part or portion of
population chosen for
study
Characteristics and
Symbols
Parameters
Population size = N
Population mean =
Population standard
deviation = o
Statistics
Sample size = n
Sample mean = x
Sample standard deviation
= E
Types of sampling
Non random or judgement
Random or probability
Methods of sampling
Sampling is the fundamental method of inferring
information about an entire population without going to
the trouble or expense of measuring every member of
the population. Developing the proper sampling
technique can greatly affect the accuracy of your results.
Random sampling
Members of the population are chosen in
such a way that all have an equal chance
to be measured.
Other names for random sampling include
representative and proportionate
sampling because all groups should be
proportionately represented.
Types of Random sampling
Simple random sampling
Systematic Sampling: Every kth member of the
population is sampled.
Stratified Sampling: The population is divided into two
or more strata and each subpopulation is sampled
(usually randomly).
Cluster Sampling: A population is divided into clusters
and a few of these (often randomly selected) clusters are
exhaustively sampled.
Stratified v/s cluster
Stratified when each group has small variation withn itself but if
there is wide variation between groups
Cluster when there is considerable variation within each group
but groups are similar to each other

Sampling from Normal Populations
Sampling Distribution of the mean
the probability distribution of
sample means, with all
samples having the same sample size n.

Standard error of mean for infinite populations
o
x
= o/n
1/2
Standard Normal probability distribution
Density Curve (or probability density function)
the graph of a continuous probability distribution
The total area under the curve must equal 1.

Every point on the curve must have a vertical height that is 0 or
greater.

Definitions
Because the total area under the
density curve is equal to 1,
there is a correspondence between
area and probability.
Definition
Standard Normal Deviation
a normal probability distribution that has a
mean of 0 and a standard deviation of 1
Definition
Standard Normal Deviation
a normal probability distribution that has a
mean of 0 and a standard deviation of 1
0 1 2 3 -1 -2 -3
0
z = 1.58
Area = 0.3413
Area
0.4429
Score (z )
Table A-2
Standard Normal Distribution
= 0 o = 1
0 x
z
.0239
.0636
.1026
.1406
.1772
.2123
.2454
.2764
.3051
.3315
.3554
.3770
.3962
.4131
.4279
.4406
.4515
.4608
.4686
.4750
.4803
.4846
.4881
.4909
.4931
.4948
.4961
.4971
.4979
.4985
.4989
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
.0000
.0398
.0793
.1179
.1554
.1915
.2257
.2580
.2881
.3159
.3413
.3643
.3849
.4032
.4192
.4332
.4452
.4554
.4641
.4713
.4772
.4821
.4861
.4893
.4918
.4938
.4953
.4965
.4974
.4981
.4987
.0040
.0438
.0832
.1217
.1591
.1950
.2291
.2611
.2910
.3186
.3438
.3665
.3869
.4049
.4207
.4345
.4463
.4564
.4649
.4719
.4778
.4826
.4864
.4896
.4920
.4940
.4955
.4966
.4975
.4982
.4987
.0080
.0478
.0871
.1255
.1628
.1985
.2324
.2642
.2939
.3212
.3461
.3686
.3888
.4066
.4222
.4357
.4474
.4573
.4656
.4726
.4783
.4830
.4868
.4898
.4922
.4941
.4956
.4967
.4976
.4982
.4987
.0120
.0517
.0910
.1293
.1664
.2019
.2357
.2673
.2967
.3238
.3485
.3708
.3907
.4082
.4236
.4370
.4484
.4582
.4664
.4732
.4788
.4834
.4871
.4901
.4925
.4943
.4957
.4968
.4977
.4983
.4988
.0160
.0557
.0948
.1331
.1700
.2054
.2389
.2704
.2995
.3264
.3508
.3729
.3925
.4099
.4251
.4382
.4495
.4591
.4671
.4738
.4793
.4838
.4875
.4904
.4927
.4945
.4959
.4969
.4977
.4984
.4988
.0199
.0596
.0987
.1368
.1736
.2088
.2422
.2734
.3023
.3289
.3531
.3749
.3944
.4115
.4265
.4394
.4505
.4599
.4678
.4744
.4798
.4842
.4878
.4906
.4929
.4946
.4960
.4970
.4978
.4984
.4989
.0279
.0675
.1064
.1443
.1808
.2157
.2486
.2794
.3078
.3340
.3577
.3790
.3980
.4147
.4292
.4418
.4525
.4616
.4693
.4756
.4808
.4850
.4884
.4911
.4932
.4949
.4962
.4972
.4979
.4985
.4989
.0319
.0714
.1103
.1480
.1844
.2190
.2517
.2823
.3106
.3365
.3599
.3810
.3997
.4162
.4306
.4429
.4535
.4625
.4699
.4761
.4812
.4854
.4887
.4913
.4934
.4951
.4963
.4973
.4980
.4986
.4990
.0359
.0753
.1141
.1517
.1879
.2224
.2549
.2852
.3133
.3389
.3621
.3830
.4015
.4177
.4319
.4441
.4545
.4633
.4706
.4767
.4817
.4857
.4890
.4916
.4936
.4952
.4964
.4974
.4981
.4986
.4990
*
*
.00 .01 .02 .03 .04 .05 .06 .07 .08 .09
z
Table for Standard Normal (z) Distribution
Example: If a data reader has an average (mean)
reading of 0 units and a standard deviation of 1 unit and if
one data reader is randomly selected, find the probability
that it gives a reading between 0 and 1.58 units.
That is 44.29% of the readings between 0 and
1.58 degrees.
0 1.58
Area = 0.4429
P ( 0 < x < 1.58 ) = 0.4429
Central Limit Theorem

1. The random variable x has a distribution (which
may or may not be normal) with mean and
standard deviation o.
2. Samples all of the same size n are randomly
selected from the population of x values.

Central Limit Theorem
1. The distribution of sample x will, as the
sample size increases, approach a normal
distribution.
2. The mean of the sample means will be the
population mean .
3. The standard deviation of the sample means
will approach o/ .


n
Practical Rules Commonly Used:
1. For samples of size n larger than 30, the distribution of
the sample means can be approximated reasonably well
by a normal distribution. The approximation gets better
as the sample size n becomes larger.
2. If the original population is itself normally distributed,
then the sample means will be normally distributed for
any sample size n (not just the values of n larger than 30).
REGRESSION -
CORRELATION
Objectives
Relationship between two or more
variables
Scatter diagrams
Regression analysis
Method of least squares
Regression
Definition
Regression Equation
Regression
Definition
Regression Equation
Given a collection of paired data, the regression
equation
Regression Line
(line of best fit or least-squares line)
the graph of the regression equation
y = b
0
+ b
1
x
^
algebraically describes the relationship between the
two variables
The Regression Equation
x is the independent variable
(predictor variable)
y is the dependent variable
(response variable)
^
y = b
0
+b
1
x
^
y = mx +b
b
0
= y - intercept
b
1
= slope
Notation for Regression
Equation
y-intercept of regression equation |
0
b
0

Slope of regression equation |
1
b
1

Equation of the regression line y = |
0
+ |
1
x y = b
0
+ b
1
Population
Parameter
Sample
Statistic
x
^
Assumptions
1. We are investigating only linear relationships.
2. For each x value, y is a random variable
having a normal (bell-shaped) distribution.
All of these y distributions have the same
variance. Also, for a given value of x, the
distribution of y-values has a mean that lies
on the regression line. (Results are not
seriously affected if departures from normal
distributions and equal variances are not too
extreme.)
Definition
Correlation
exists between two variables
when one of them is related to
the other in some way
Assumptions
1. The sample of paired data (x,y) is a
random sample.
2. The pairs of (x,y) data have a
bivariate normal distribution.
Definition
Scatterplot (or scatter diagram)
is a graph in which the paired (x,y)
sample data are plotted with a
horizontal x axis and a vertical y
axis. Each individual (x,y) pair is
plotted as a single point.
Positive Linear Correlation
x
x
y
y y
x
(a) Positive
(b) Strong
positive
(c) Perfect
positive
Negative Linear Correlation
x
x
y
y y
x
(d) Negative
(e) Strong
negative
(f) Perfect
negative
No Linear Correlation
x
x
y
y
(g) No Correlation
(h) Nonlinear Correlation
TIME SERIES
Objectives
Understanding four components of time
series
Compute seasonal indices
Regression based techniques
Time series
Group of data or statistical information
accumulated at regular intervals
Variations in Time series
Secular trend
A persistent trend in a single direction. A market movement over
the long term which does not reflect cyclical seasonal or
technical factors.
Cyclical fluctuation
The term business cycle or economic cycle refers to the
fluctuations of economic activity (business fluctuations) around
its long-term growth trend. The cycle involves shifts over time
between periods of relatively rapid growth of output (recovery
and prosperity), and periods of relative stagnation or decline
(contraction or recession).
Seasonal variation
Pattern of change within a year
Irregular variation
Unpredictable, changing in a random manner
Trend analysis
To describe historical patterns
Past trends will help us project future

LINEAR PROGRAMMING
Objectives
Understanding Linear programming basics
Graphic and Simplex methods
Linear Programming
Problem formulation if
All equations are linear
Constraints are known and deterministic
Variables should have non negative values
Decision values are also divisible
Types of LP problems
Maximisation
Minimisation
Transportation
Decision making
Multiple Choice Questions

1. If A invests Rs. 24 at 7 % interest rate for
5 years, total value at end of five years is
a. 31.66
b. 33.66
c. 36.66
d. 39.66
1. If A invests Rs. 24 at 7 % interest rate for
5 years, total value at end of five years is
a. 31.66
b. 33.66
c. 36.66
d. 39.66
What is the effective annual rate of 12%
compounded semiannually?
A) 11.24%
B) 12.00%
C) 12.36%
D) 12.54%

What is the effective annual rate of 12%
compounded semiannually?
A) 11.24%
B) 12.00%
C) 12.36% *
D) 12.54%

What is the effective annual rate of 12%
compounded continuously?
A) 11.27%
B) 12.00%
C) 12.68%
D) 12.75%
What is the effective annual rate of 12%
compounded continuously?
A) 11.27%
B) 12.00%
C) 12.68%
D) 12.75% *
A study is done to see if there is a linear
relationship between the life expectancy of
an individual and the year of birth. The
year of birth is the ______________.
A. Unable to determine
B. dependent variable
C. independent variable

A study is done to see if there is a linear
relationship between the life expectancy of
an individual and the year of birth. The
year of birth is the ______________.
A. Unable to determine
B. dependent variable
C. independent variable *

Which of the following is an example of using
statistical sampling?
a. Statistical sampling will be looked upon by the
courts as providing superior audit evidence.
b. Statistical sampling requires the auditor to
make fewer judgmental decisions.
c. Statistical sampling aids the auditor in
evaluating results.
d. Statistical sampling is more convenient to use
than nonstatistical sampling.


Which of the following is an example of using
statistical sampling?
a. Statistical sampling will be looked upon by the
courts as providing superior audit evidence.
b. Statistical sampling requires the auditor to
make fewer judgmental decisions.*
c. Statistical sampling aids the auditor in
evaluating results.
d. Statistical sampling is more convenient to use
than nonstatistical sampling.


Which of the following best illustrates the concept of
sampling risk?
a. An auditor may select audit procedures that are not
appropriate to achieve the specific objective.
b. The documents related to the chosen sample may not
be available for inspection.
c. A randomly chosen sample may not be representative
of the population as a whole.
d. An auditor may fail to recognize deviations in the
documents examined.


Which of the following best illustrates the concept of
sampling risk?
a. An auditor may select audit procedures that are not
appropriate to achieve the specific objective.
b. The documents related to the chosen sample may not
be available for inspection.
c. A randomly chosen sample may not be representative
of the population as a whole.*
d. An auditor may fail to recognize deviations in the
documents examined.


The advantage of using statistical sampling
techniques is that such techniques
a. Mathematically measure risk.
b. Eliminate the need for judgmental decisions.
c. Are easier to use than other sampling
techniques.
d. Have been established in the courts to be
superior to nonstatistical sampling.


The advantage of using statistical sampling
techniques is that such techniques
a. Mathematically measure risk. *
b. Eliminate the need for judgmental decisions.
c. Are easier to use than other sampling
techniques.
d. Have been established in the courts to be
superior to nonstatistical sampling.


Time series methods
a. discover a pattern in historical data and
project it into the future.
b. include cause-effect relationships.
c. are useful when historical information is
not available.
d. All of the alternatives are true.


Time series methods
a. discover a pattern in historical data and
project it into the future.
b. include cause-effect relationships.
c. are useful when historical information is
not available.
d. All of the alternatives are true.


Gradual shifting of a time series over a
long period of time is called
a. periodicity.
b. cycle.
c. regression.
d. trend.

Gradual shifting of a time series over a
long period of time is called
a. periodicity.
b. cycle.
c. regression.
d. trend. *


Seasonal components
a. cannot be predicted.
b. are regular repeated patterns.
c. are long runs of observations above or
below the trend line.
d. reflect a shift in the series over time.
Seasonal components
a. cannot be predicted.
b. are regular repeated patterns. *
c. are long runs of observations above or
below the trend line.
d. reflect a shift in the series over time.
Short-term, unanticipated, and
nonrecurring factors in a time series
provide the random variability known as
a. uncertainty.
b. the forecast error.
c. the residuals.
d. the irregular component.


Short-term, unanticipated, and
nonrecurring factors in a time series
provide the random variability known as
a. uncertainty.
b. the forecast error.
c. the residuals.
d. the irregular component.*


The focus of smoothing methods is to
smooth
a. the irregular component.
b. wide seasonal variations.
c. significant trend effects.
d. long range forecasts.


The focus of smoothing methods is to
smooth
a. the irregular component. *
b. wide seasonal variations.
c. significant trend effects.
d. long range forecasts.


. Linear trend is calculated as Tt = 28.5
+ .75t. The trend projection for period 15
is
a. 11.25
b. 28.50
c. 39.75
d. 44.25


. Linear trend is calculated as Tt = 28.5
+ .75t. The trend projection for period 15
is
a. 11.25
b. 28.50
c. 39.75*
d. 44.25


The forecasting method that is appropriate
when the time series has no significant
trend, cyclical, or seasonal effect is
a. moving averages
b. mean squared error
c. mean average deviation
d. qualitative forecasting methods


The forecasting method that is appropriate
when the time series has no significant
trend, cyclical, or seasonal effect is
a. moving averages *
b. mean squared error
c. mean average deviation
d. qualitative forecasting methods


Thank You