SECTION - A

PART One:

Q1. Option “b” – a

Q2. Option “d” – 0.6

Q3. Option “d” – b-a

Q4. Option “a” – Zero coupons

Q5. Option “a” – Static condition

Q6. Option “c” – Average rate of return

Q7. Option “d” – Interest on borrowed funds before commercial

production

Q8. Option “c” – Internal rate of return

Q9. Option “a” – Cash outflow

Q10. Option “c” – Value at risk

PART Two:

Ans1.

Cash flow is essentially the movement of money into and out of the
business; it's the cycle of cash inflows and cash outflows that determine the
business' solvency.

Cash flow analysis is the study of the cycle of the business' cash inflows
and outflows, with the purpose of maintaining an adequate cash flow for the
business, and to provide the basis for cash flow management. Cash flow
analysis involves examining the components of the business that affect cash
flow, such as accounts receivable, inventory, accounts payable, and credit
terms. By performing a cash flow analysis on these separate components,
we'll be able to more easily identify cash flow problems and find ways to
improve your cash flow.

Annuity

An annuity is a series of equal cash flows paid at equal time intervals for a
finite number of periods. A lease that calls for payments of $1000 each
month for a year would be referred to as a “12-period, $1000 annuity” Note
that, strictly speaking, in order for a series of cash flows to be considered an
annuity, each cash flow must be identical and the amount of time between
each cash flow must be the same in all cases. There are two types of
annuities that vary only in the timing of the first cash flow:

• Regular Annuity – The first payment is made one period in the

future (at period 1).
• Annuity Due – The first payment is made immediately (at period
0).
Annuity cash flow
An Annuity is a cash flow stream which adheres to a specific pattern.
Namely, an Annuity is a cash flow stream in which the cash flows are level
(i.e., all of the cash flows are equal) and the cash flows occur at a regular
interval. The annuity cash flows are called annuity payments or simply
payments. Thus, the following cash flow stream is an annuity.
Figure 1

• While, the following cash flow stream is not an annuity because the
payments do not occur at a regular interval.

Figure 2
 • When a cash flow stream is of the form given in Figure 1, i.e., an
annuity, the process of finding the Present Value or Future Value of
the cash flow stream is greatly simplified.
Annuities are primarily used as a means of securing a steady cash flow for an
individual during their retirement years.

Ans 2

Sampling is very often used in our daily life. For example while purchasing
food grains from a shop we usually examine a handful from the bag to assess
the quality of the commodity. A doctor examines a few drops of blood as
sample and draws conclusion about the blood constitution of the whole body.
Thus most of our investigations are based on samples.

Stratified Random Sampling:

Of all the methods of sampling the procedure commonly used in surveys is
stratified sampling. This technique is mainly used to reduce the population
heterogeneity and to increase the efficiency of the estimates. Stratification
means division into groups. In this method the population is divided into a
number of subgroups or strata. The strata should be so formed that each
stratum is homogeneous as far as possible. Then from each stratum a simple
random sample may be selected and these are combined together to form
the required sample from the population.

Types of Stratified Sampling:

There are two types of stratified sampling. They are proportional and non-
proportional. In the proportional sampling equal and proportionate
representation is given to subgroups or strata. If the number of items is
large, the sample will have a higher size and vice versa.
The population size is denoted by N and the sample size is denoted by ‘n’ the
sample size is allocated to each stratum in such a way that the sample
fractions is a constant for each stratum. That is given by n/N = c. So in this
method each stratum is represented according to its size.
In non-proportionate sample, equal representation is given to all the sub-
strata regardless of their existence in the population.

Merits and limitations of stratified sampling:

Merits:
1. It is more representative.
2. It ensures greater accuracy.
3. It is easy to administer as the universe is sub - divided.
4. Greater geographical concentration reduces time and expenses.
5. When the original population is badly skewed, this method is appropriate.
6. For non – homogeneous population, it may field good results.
Limitations:
1. To divide the population into homogeneous strata, it requires more money,
time and statistical experience which are a difficult one.
2. Improper stratification leads to bias, if the different strata overlap such a
sample will not be a representative one.

Ans 3

The central limit theorem and the standard errors of the mean and of the
proportion are based on the premise that the samples selected are chosen
with replacement. However, in virtually all survey research, sampling is
conducted without replacement from populations that are of a finite size N.
In these cases, particularly when the sample size n is not small in
comparison with the population size N (i.e., more than 5% of the population
is sampled) so that n/N > 0.05, a finite population correction factor
(fpc) is used to define both the standard error of the mean and the standard
error of the proportion. It is also known as finite population multiplier. The
finite population correction factor is expressed as

The finite population multiper is: ((N-n)/ (N-1)).

Examining the formula for the finite population correction factor, observe
that the numerator is always smaller than the denominator, since n is
greater than 1 for all practical cases. Therefore, the correction factor is less
than 1. Because this finite population correction factor is multiplied by the
standard error, the standard error becomes smaller when corrected.
Therefore more precise estimates are obtained when the finite population
correction factor is used.
If you are sampling without replacement and your sample size is more than,
say, 5% of the finite population (N), you need to adjust (reduce) the standard
error by multiplying it by the finite population correction factor as specified
above. If we can assume that the population is infinite or that our sample
size does not exceed 5% of the population size (or we are sampling with
replacement), then there is no need to apply this correction factor.
Ans 4

Central Limit Theorem: As sample size increases, the sampling distribution

of sample means approaches that of a normal distribution with a mean the
same as the population and a standard deviation equal to the standard
deviation of the population divided by the square root of n (the sample size).
The Central Limit Theorem describes the characteristics of the "population
of the means" which has been created from the means of an infinite
number of random population samples of size (N), all of them drawn from a
given "parent population". The Central Limit Theorem predicts that
regardless of the distribution of the parent population:
[1] The mean of the population of means is always equal to the mean of the
parent population from which the population samples were drawn.
[2] The standard deviation of the population of means is always equal to
the standard deviation of the parent population divided by the square root of
the sample size (N).
[3] [And the most amazing part!!] The distribution of means will
increasingly approximate a normal distribution as the size N of samples
increases.
A consequence of Central Limit Theorem is that if we average measurements
of a particular quantity, the distribution of our average tends toward a
normal one. In addition, if a measured variable is actually a combination of
several other uncorrelated variables, all of them "contaminated" with a
random error of any distribution, our measurements tend to be contaminated
with a random error that is normally distributed as the number of these
variables increases.
Thus, the Central Limit Theorem explains the ubiquity of the famous bell-
shaped "Normal distribution" (or "Gaussian distribution") in the
measurements domain.

The central limit theorem explains why many distributions tend to be close to
the normal distribution. The key ingredient is that the random variable being
observed should be the sum or mean of many independent identically
distributed random variables.

The central limit theorem states that given a distribution with a mean μ and
variance σ², the sampling distribution of the mean approaches a normal
distribution with a mean (μ) and a variance σ²/N as N, the sample size,
increases. The amazing and counter-intuitive thing about the central limit
theorem is that no matter what the shape of the original distribution, the
sampling distribution of the mean approaches a normal distribution.
Furthermore, for most distributions, a normal distribution is approached very
quickly as N increases. Keep in mind that N is the sample size for each mean
and not the number of samples. Remember in a sampling distribution the
number of samples is assumed to be infinite. The sample size is the number
of scores in each sample; it is the number of scores that goes into the
computation of each mean.
Two important implications of this theorem follow:
(1) Random samples can be drawn from any population, normally distributed
or not. Thus, even if it is known that the dollar value of a certain inventory
item is not normally distributed, the theorem can be invoked and the
assumption made that the sample mean inventory dollar value will be
normally distributed.
(2) The theorem allows statements to be made about the value of the
population mean without looking at the entire population. Thus, interval
estimates can be made about the true value of an inventory item. Such
interval estimates are called Confidence Interval.

SECTION –B
CASELET – 1