ASSIGNMENT

Course Code : MS 08
Course Title : Quantitative Analysis for Managerial Applications
Assignment No. : 08/TMA/SEM-II/2010
Coverage : All Blocks

Note: Attempt all the questions and send it to the coordinator of the study centre, you are
attached with.

1. ‘The manager should seek some balance between quantitative and qualitative factors in
decision making’. Elaborate the statement giving the situations in which various
statistical tools are used.
Solution : Quantitative and Qualitative Factors in Decision Making
Quantitative Factors –LET US TAKE THE Investment Appraisal.
THE FACTORS CONSIDERED ARE
Payback period
NPV
ARR
Provide a numerical basis for decision making – reduces decisions to looking at a monetary value
placed on different choices, e.g. Forecasted sales figures for the next 3 years The cost of a series
of redundancies against the longer term financial benefits to the firm of this process But: such
data provides only part of the story Other factors need to be taken into account, particularly the
effects of decisions on stakeholder groups and their response to such decisions, e.g.
The takeover of Manchester United CLUB by Malcolm Glazer might make financial sense but
the reaction of the supporters might make the move unworkable

QUALITATIVE FACTORS
Qualitative factors look to take account of these other issues that may influence the outcome
of a decision Can be wide ranging and especially need to consider the impact on human
resources and their response to decisions

CONDUCT THE SWOT ANALYSIS

A decisions (for example, investment in a new production plant) could be considered not only in
financial terms but also to apply other techniques of decision making
to look at wider issues:
A SWOT analysis might be part of this:
-STRENGTHS
-WEAKNESSES
-OPPORTUNITIES
-THREATS
PEST ANALYSIS
Might also need to factor in other external issues that might influence the decision making
process which can be summarised as:
-POLITICAL
-ECONOMIC
-SOCIAL
-TECHNOLOGOCAL
Political could be in its widest sense,
e.g. the internal politics of a firm as well as the national and international political effect
The decision to site a series of wind turbines in a coastal area might be justified on financial
grounds but:
What is the reaction of the local community?
Does government policy support such planning developments?
Are there social impacts – e.g. noise pollution, damage to eco-systems, etc?
Such factors may make the difference between success and failure

Human Resources Management

Impact on a firm’s human resources is essential to consider, in particular the effects on:
Motivation
Morale
Recruitment and Retention
May be difficulty to assess and measure
May need to distinguish between short term effects and long term

Stakeholder Analysis
Wider impacts on stakeholder groups may also be necessary, such stakeholders include:
-EMPLOYEES
-SHAREHOLDERS
-MANAGERS
-ENVIRONMENT
-LOCAL COMMUNITY
-SUPPLIERS
-GOVERNMENT
-CONSUMERS

DECISION MAKING
Eventual decision may rest on the balance between the perceived effects of quantitative and
qualitative If the long term effect on the workforce for example was to reduce productivity or
increase absence because of the impact on motivation and morale, the fact that a decision makes
financial sense may be shelved! Qualitative by its nature, therefore, is very subjective
considerations in decision making, in addition to the quantitative or financial factors highlighted
by incremental analysis . They are the factors relevant to a decision that are difficult to measure
in terms of money. Qualitative factors may include: (1) effect on employee morale, schedules and
other internal elements; (2) relationships with and commitments to suppliers; (3) effect on present
and future customers; and (4) long-term future effect on profitability. In some decision-making
situations, qualitative aspects are more important than immediate financial benefit from a
decision. HERE IS ANOTHER EXAMPLE OF THE QUANTITATIVE AND
QUALITATIVE FACTORS IN DECISION MAKING. SALES FORECAST FOR AN
ORGANIZATION. THE SALES MANAGER WOULD USE A COMBINATION OF
THESE TOOLS TO ARRIVE AT THE FINAL DECISION.

QUANTITATIVE METHODS
METHOD 1
The field perspective, or “field assessment,” is based on a rollup of individual forecasts,
providing management with a bottom-up view of current market conditions
TERRITORY 1 FORECASTS $5mill.
TERRITORY 2 FORECASTS $6mill.
TERRITORY 3 FORECASTS $9mill.
TERRITORY 4 FORECASTS $6mill.
TERRITORY 5 FORECASTS $8mill.
TERRITORY 6 FORECASTS $7mill.
TERRITORY 7 FORECASTS $4mill.
TERRITORY 8 FORECASTS $4mill.
TERRITORY 9 FORECASTS $3mill.
TERRITORY 10 FORECASTS $3mill.

NATIONAL TOTAL SALES FORECAST =$55 mill

METHOD 2
• The pipeline perspective, or “pipeline
assessment,” is generated by analyzing
opportunities at each stage of the
pipeline, enabling management to
assess sales targets from an aggregate,
top-down viewpoint.
1.MARKET POTENTAIL FORECAST $400 mill.
MARKET SHARE FORECAST 15% = $60 mill.
2.FIELDSALES FORECAST = $55 mill.
3. MARKETING CHANNEL FORECAST =$ 58 mill.
4. CUSTOMERS' END USE EXPECTATIONS FORECAST =$57 mill.
THE AVERAGE OF THIS WORKING = $57.5 mill.

METHOD 3
The historical perspective, or “analytic assessment,” is based on a comparison
of current pipeline data with historical trends, allowing the company to apply knowledge gained
from prior periods to the current forecast.
YEAR 2004 $45mill.
YEAR 2005 $48mill.
YEAR 2006 $51mill.
YEAR 2007 $54mill.
YEAR 2008 $57mill.
FORECAST

METHOD 4
Triangulated Forecasting provides a set of checks and balances that enables
management to quickly identify potential problems. Additionally, the analytic
assessment highlights that, at this point in the quarter, the company’s forecasts are typically 20
percent above final attainment. Taking all three perspectives into account, management can
quickly recognize that the company is unlikely to meet its original forecast unless corrective
action is taken immediately.

METHOD 5
Simple moving average: A simple moving average (SMA) is the unweighted MEAN of the
previous N data points. For example, a 5 -YEAR simple moving average of closing SALES is
the mean of the previous 5 YEARS ' closing SALES .
If those SALES are YEAR1= 150, YEAR2 = 170, YEAR3=190, YEAR4= 200, YEAR5=210
,then the formula is150+170+190+200+210=800/5 = FORECAST = 220

QUALITITATIVE METHODS
METHOD 1
The Delphi method is a systematic interactive forecasting method for obtaining forecasts from a
panel of independent experts. The carefully selected experts answer questionnaires in two or more
rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts
from the previous round as well as the reasons they provided for their judgments. Thus,
participants are encouraged to revise their earlier answers in light of the replies of other members
of the group. It is believed that during this process the range of the answers will decrease and the
group will converge towards the "correct" answer. Finally, the process is stopped after a pre-
defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and
the mean or median scores of the final rounds determine the results.
Delphi is based on well-researched principles and provides forecasts that are more accurate than
those from unstructured groups. The technique can be adapted for use in face-to-face meetings,
and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been widely used for
business forecasting and has certain advantages over another structured forecasting approach:
prediction markets.

METHOD 2
Scenario analysis -is a process of analyzing possible future events by considering alternative
possible outcomes (scenarios). The analysis is designed to allow improved decision-making by
allowing more complete consideration of outcomes and their implications.
For example, in economics and finance, a financial institution might attempt to forecast several
possible scenarios for the economy (e.g. rapid growth, moderate growth, slow growth) and it
might also attempt to forecast financial market returns (for bonds, stocks and cash) in each of
those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to
determine correlations and assign probabilities to the scenarios (and sub-sets if any). Then it will
be in a position to consider how to distribute assets between asset types (i.e. asset allocation); the
institution can also calculate the scenario-weighted expected return (which figure will indicate the
overall attractiveness of the financial environment).
Depending on the complexity of the financial environment, in economics and finance scenario
analysis can be a demanding exercise. It can be difficult to foresee what the future holds (e.g. the
actual future outcome may be entirely unexpected), i.e. to foresee what the scenarios are, and to
assign probabilities to them; and this is true of the general forecasts never mind the implied
financial market returns. The outcomes can be modelled mathematically/statistically e.g. taking
account of possible variability within single scenarios as well as possible relationships between
scenarios.

METHOD 3
Rational and explicit methods: The whole purpose of the recitation of alternatives, is to show that
there really is no alternative to forecasting. If a decisionmaker has several alternatives open to
him, he will choose among them on the basis of which provides him with the most desirable
outcome. Thus his decision is inevitably based on a forecast. His only choice is whether the
forecast is obtained by rational and explicit methods, or by intuitive means. The virtues of the use
of rational methods are as follows: They can be taught and learned, They can be described and
explained They provide a procedure followable by anyone who has absorbed the necessary
training, and in some cases, These methods are even guaranteed to produce the same forecast
regardless of who uses them. The virtue of the use of EXPLICIT methods is that they can be
reviewed by others, and can be checked for consistency. Furthermore, the forecast can be
reviewed at any subsequent time.

METHOD 4
Genius forecasting: This method is based on a combination of intuition, insight, and luck.
Psychics and crystal ball readers are the most extreme case of genius forecasting. Their forecasts
are based exclusively on intuition. Science fiction writers have sometimes described new
technologies with uncanny accuracy.
There are many examples where men and women have been remarkable successful at predicting
the future. There are also many examples of wrong forecasts. The weakness in genius forecasting
is that its impossible to recognize a good forecast until the forecast has come to pass.
Some psychic individuals are capable of producing consistently accurate forecasts. Mainstream
science generally ignores this fact because the implications are simply to difficult to accept. Our
current understanding of reality is not adequate to explain this phenomena.

METHOD 5
Cross-impact matrix method Relationships often exist between events and developments that are
not revealed by univariate forecasting techniques. The cross-impact matrix method recognizes
that the occurrence of an event can, in turn, effect the likelihoods of other events. Probabilities are
assigned to reflect the likelihood of an event in the presence and absence of other events. The
resultant inter-correlational structure can be used to examine the relationships of the components
to each other, and within the overall system. The advantage of this technique is that it forces
forecasters and policy-makers to look at the relationships between system components, rather
than viewing any variable as working independently of the others.
Considerations in the choice of forecasting methods?
The selection of the forecast
method should be based on several criteria taking into
account the applicability of the forecast method
complexity, i.e., forecast accuracy level, period of time, the
scope of initial data, forecast costs, and the level of result
appropriateness and applicability.

Type of information (quantitative and qualitative

forecast methods).
• Forecast time span (short-term, mid-term and longterm
forecast development methods).
• Forecast object (micro and macro economic indicator
forecast methods).
• Forecast goal (genetic and normative forecast methods).

CRITERIA FOR THE DECISION MAKING.

Accuracy
Ease of interpretation
Ease of use
Ease of using data
Credibility
Speed
Cost savings
Ease of implementation
Time horizon
Adaptive to condition
===============================================================

2. Among the examinees in an examination 30%, 35% and 45% failed in Statistics, in
Mathematics, and in at least one of the subjects respectively. An examinee is selected at
random. Find the probabilities that

a. He failed in Mathematics only

b. He passed in Statistics, if it is known that he has failed in Mathematics

Solution : Let

E be the case of selecting a candidate failed in statistics.

F be the case of selecting a candidate failed in Maths

Then,

n(E) = 30%

n(F) = 35%

n(E or F) OR n(EUF) = 45%

n(S) = 100%

(a) Probability that he failed in maths only

P (F) = n(F)/n(S)

 P(F) = 35/100 = 7/20

(b) He passed in Statistics, if it is known that he has failed in Mathematics

i.e. it’s a case of “ Conditional Probability” where the event that he has failed in maths already
occurred.

If P (E) is the probability of failing in stastics than P(E’) is the probability of passing in
statistics.

So, P(E’) = 1 – P(E)

Now, here according to the question,

P(E’/F) = 1- P(E/F) = 1 – {n(E ∩ F) / n(F)}

 P(E’/F) = 1 - [{n(E) + n(F) – n(EU F)} ÷ n (F)]

 P(E’/F) = 1 - [{ 30 + 35 - 45}÷ 35]

 P(E’/F) = 1 - [20 ÷ 35]

 P(E’/F) = 1 – 4/7

 P(E’/F) = 3/7

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Q .3 From a set of 1000 observations known to be normally distributed, the mean is 534 cm
and SD is 13.5 cm. How many observations are likely to exceed 561 cm? How many will be
 between 520.5 cm and 547.5 cm? Between what limits will the middle 50% of the
observations lie?

Solution : not known yet. Coming soon..

4. Write a note on “standard error. Distinguish between Standard error and Sampling error.

Solution : The standard error of a method of measurement or estimation is the standard

deviation of the sampling distribution associated with the estimation method.[1]The term may also
be used to refer to an estimate of that standard deviation, derived from a particular sample used to
compute the estimate.

For example, the sample mean is the usual estimator of a population mean. However, different
samples drawn from that same population would in general have different values of the sample
mean. The standard error of the mean(i.e., of using the sample mean as a method of estimating
the population mean) is the standard deviation of those sample means over all possible samples
(of a given size) drawn from the population. Secondly, the standard error of the mean can refer to
an estimate of that standard deviation, computed from the sample of data being analysed at the
time.

For a value that is sampled with an unbiased normally distributed error, the above depicts the
proportion of samples that would fall between 0, 1, 2, and 3 standard errors above and below the
actual value.

A mnemonic for remembering the term standard error is that, as long as the estimator is
unbiased, the standard deviation of the error (the difference between the estimate and the true
value) is the same as the standard deviation of the estimates themselves; this is true since the
standard deviation of the difference between the random variable and its expected value is equal
to the standard deviation of a random variable itself.

In many practical applications, the true value of the standard deviation is usually unknown. As a
result, the term standard error is often used to refer to an estimate of this unknown quantity. In
such cases it is important to be clear about what has been done and to attempt to take proper
account of the fact that the standard error is only an estimate. Unfortunately, this is not often
possible and it may then be better to use an approach that avoids using a standard error, for
example by using maximum likelihood or a more formal approach to deriving confidence
intervals. One well-known case where a proper allowance can be made arises where the Student's
t-distribution is used to provide aconfidence interval for an estimated mean or difference of
means. In other cases, the standard error may usefully be used to provide an indication of the size
of the uncertainty, but its formal or semi-formal use to provide confidence intervals or tests
should be avoided unless the sample size is at least moderately large. Here "large enough" would
depend on the particular quantities being analysed.
Standard error of the mean

Further information: Variance#Sum of uncorrelated variables (Bienaymé formula)

The standard error of the mean (SEM) is the standard deviation of the sample mean estimate of
a population mean. (It can also be viewed as the standard deviation of the error in the sample
mean relative to the true mean, since the sample mean is an unbiased estimator.) SEM is usually
estimated by the sample estimate of the population standard deviation (sample standard
deviation) divided by the square root of the sample size (assuming statistical independence of the
values in the sample):

where

s is the sample standard deviation (i.e., the sample based estimate of the standard
deviation of the population), and
n is the size (number of observations) of the sample.

This estimate may be compared with the formula for the true standard deviation
of the mean:

where
 σ is the standard deviation of the population.

Note 1: Standard error may also be defined as the standard deviation of the residual error term.[2][3]

Note 2: Both the standard error and the standard deviation of small samples tend to systematically
underestimate the population standard error and deviations: the standard error of the mean is
a biased estimator of the population standard error. With n = 2 the underestimate is about 25%,
but for n = 6 the underestimate is only 5%. Gurland and Tripathi (1971)[4] provide a correction
and equation for this effect. Sokal and Rohlf (1981)[5] give an equation of the correction factor for
small samples of n < 20. See unbiased estimation of standard deviation for further discussion.

A practical result: Decreasing the uncertainty in your mean value estimate by a factor of two
requires that you acquire four times as many observations in your sample. Worse, decreasing
standard error by a factor of ten requires a hundred times as many observations.

Expected error in the mean of A for a sample of n data points with sample bias coefficient ρ. The
unbiasedstandard error plots as the ρ=0 line with log-log slope -½.

Relative standard error

The relative standard error (RSE) is simply the standard error divided by the mean and expressed
as a percentage. For example, consider two surveys of household income that both result in a
sample mean of $50,000. If one survey has a standard error of $10,000 and the other has a
standard error of $5,000, then the relative standard errors are 20% and 10% respectively.
Intuitively, the survey with the lower standard error would seem to be more reliable since there is
less dispersion around the mean. In fact, data organizations often set reliability standards that
their data must meet before publication. For example, the U.S. National Center for Health
Statistics typically does not report an estimate if the relative standard error exceeds 30%. (NCHS
also typically requires at least 30 observations for an estimate to be reported.)

In statistics, sampling error or estimation error is the error caused by observing a sample
instead of the whole population. [1] The sampling error can be found by subtracting the value of a
parameter from the value of a statistic.[citation needed] In nursing research, a sampling error is the
difference between a sample statistic used to estimate a population parameter and the actual but
unknown value of the parameter (Bunns & Grove, 2009). An estimate of a quantity of interest,
such as an average or percentage, will generally be subject to sample-to-sample variation.[1] These
variations in the possible sample values of a statistic can theoretically be expressed as sampling
errors, although in practice the exact sampling error is typically unknown. Sampling error also
refers more broadly to this phenomenon of random sampling variation.

The likely size of the sampling error can generally be controlled by taking a large enough random
sample from the population,[2] although the cost of doing this may be prohibitive; see sample
size and statistical power for more detail. If the observations are collected from a random
sample, statistical theory provides probabilistic estimates of the likely size of the sampling error
for a particular statistic or estimator. These are often expressed in terms of its standard error.

Sampling bias is a possible source of sampling errors. It leads to sampling errors which either
have a prevalence to be positive or negative. Such errors can be considered to be systematic
errors.

Sampling error can be contrasted with non-sampling error. Non-sampling error is a catch-all term
for the deviations from the true value that are not a function of the sample chosen, including
various systematic errors and any random errors that are not due to sampling. Non-sampling
errors are much harder to quantify than sampling error

5. Compute the two regression equations on the basis of the following data:
X Y
Mean 40 45
Standard Deviation 10 9
 Given that the coefficient of correlation between X & Y is 0.50. Also estimate the
value of Y for X=48?

Solution Given

__
X = 40 σx = 10

__
Y = 45 σy = 9

Coeff. Of correlation “r” between Y and X = 0.50

Now, the equation of line of regression of Y on X is given by

__ __
Y – Y = r . σy / σx ( X – X )
 Y – 45 = 0.50 x 9/10 (X – 40)
 Y – 45 = 0.45 X – 18
 Y = 0.45X + 27 --------------------(i)

when X = 48, then

Y = 0.45 x 48 + 27
 Y = 48.60

Now, the equation of the line of regression of X on Y is given by

__ __
( X – X ) = r. σx / σx ( Y – Y )
 X – 40 = 0.50 x 10/9 ( Y – 45)
 X – 40 = (5/9) Y – 25
 X = (5/9) Y + 15
 OR X = 0.55Y + 15 ------------------------------(ii)
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