Projection and Forecasting Techniques: Part 1_ M1

Question 1

What mix of stocks creates a portfolia with the least amount of risk?

Answer 1

#1 Perfectly negatively correlated: Risk reduction is best achieved by combining stocks that are as negatively correlated to each other as possible.
#2 Not correlated: these benefits are not as substantial.
#3 Positively correlated: Risk reduction standpoint are minimal.
#4 Perfectly Positive correlate: No risk reduction benefits associated.

Question 2

What does the coefficient of correlation measures?

Determination of Correlation Determination is R2 (squared)

Answer 2

The Coefficient of Correlation
measures the strength and direction of the relationship between two variables.

Coefficient Relationships

• Inverse Relationship (-1.0): if one variable goes one direction while the other variable goes in the opposite direction.
• Direct Relationship (1.0): Both variables move in the same direction at approximately the same rate.
• No Relationship (0.0): There is no relationship between the two variables.

Question 3

How to read the simple linear regression formula?

y = a - Bx

Answer 3

• Variable costs per unit (B) will be constant, meaning that overall variable costs will vary in direct proportion to
  changes in volume (x).
• Y (total cost) is the dependent variable, while x (volume) is the independent variable. Volume will drive total cost.
• The coefficient of determination (R-squared) will be equal to the correlation coefficient, squared.
• Fixed costs overall (not fixed costs per unit) will remain constant regardless of production

y = a - Bx

Question 4

Sensitivity Analysis vs. Probability Risk

Answer 4

• Probability (risk) analysis is used to examine the possible outcomes given different alternatives.
• Sensitivity analysis uses a trial-and-error method in which the sensitivity of the solution to changes in variables is calculated.
• Probability analysis is an extension of sensitivity analysis.
• The summation of the probability weights must equal one not greater or lessor.
• Probability analysis is compatible with sensitivity analysis

Question 5

What is the coefficient of determination in R square in a multiple regression equation?

Answer 5

The coefficient of determination (R ) is the proportion of the total
variation in the dependent variable (y) explained by the independent variable (x).

Question 6

What is the coefficient correlation?

Answer 6

• It is the square of the coefficient of correlation.
• The higher the coefficient of determination, the greater the proportion of the total variation in y that is explained by the variation in x.
• The higher it is, the better is the fit of the regression line.
• It ranges between 0 and 1.

Question 7

What is the Learning Curve?

Answer 7

• The learning curve relates to the efficiency with which productive resources, typically labor, are employed, and it suggests that productivity will increase over time.
• The number of components needed for an assembly operation with an 80 percent learning curve will increase for successive periods to accommodate increased production, assuming demand exceeds capacity.

Question 8

What is the high low method used for?

Answer 8

The high-low method is used to estimate both fixed and variable
costs, and can then be applied to determine a total cost formula that is used to estimate total costs for any level of production.