QUANTITATIVE

TECHNIQUES
Assignment
First assessment
Question 1:

Managers are quick to claim that quantitative analyst talk to them

in a jargon that does not sound like English. List four terms that might not
be understood by a manager. Then explain in nontechnical terms what
each term means.

Answer:

A quantitative analyst’s job is rather different than that of a manager.

A manager is the one who plans, controls and looks after the
administration of his/ her organization or firm, whereas a quantitative
analyst develops and implements complex mathematical models that
financial firms use to make decisions about risk management,
investments and pricing. When we look at their jobs we can see that it is
different. So it is rather common when managers don’t understand the
concept, terms and ideas that a quantitative analyst shares.
There are many technical terms used in the quantitative field, so
while in the use of it the managers did not understand it at all that they
thought the analyst was not even speaking in English. Therefore, below
are the terms that may not be understood by managers explained to clear
the confusion.

1. Deterministic Model and Probabilistic model

 A deterministic model is a mathematical that does not include
elements of randomness. Every time you run the model with the same
initial conditions you will get the same results. All values used in this
model is with complete certainty.Deterministic models can be relatively
simple and can be used when random variation is not a major influence
on the situation being modeled. The example for the deterministic model
can be, “trains in Japan run on time, usually to within less than a minute
of the scheduled time, so a deterministic model of expected travel time
could be made using the scheduled train times”.
A probabilistic model is a model that includes elements of
randomness. Probabilistic models are statistical models that include one
or more probability distributions in the model to account for the
additional factors. A probabilistic model is one which incorporates some
aspect of random variation. It is often measured as a probability value.
This model involves the chance or risk.The example for the probabilistic
model can be, “ suppose a new product come out in the market, it has a
chance of being a good product(70%-0.7) or a bad product(30%-0.3)”.

2. Schematic model

Schematic Model is a diagram in model from. A schematic model,

is a representation of the elements of a system using abstract, graphic
symbols rather than realistic pictures. It uses a picture, a drawing or even
the chart of reality. Schematic models are often used in large
presentations to allow a better understanding of how the final product will
look.
The examples of schematic model are automobiles, lawn mowers,
gears, fans etc.

3. Statistical sampling procedure

Statistical sampling procedure is the selection of the individual

observation among great population, to make statistical inferences. In
statistics, quality assurance and methodology, sampling is the selection of
subset of individuals from within a statistical population to estimate
characteristics of the whole population.
An example of the statistical sampling procedure is “ suppose a
public opinion pollster wants to know the percentage of voters that favor
a flat-rate income tax. The actual percentage of all the voters is a
population parameter. The estimate of that percentage, based on sample
data, is a sample statistic”.
The types of statistical sampling procedure are:

1. Simple random sampling

2. Systematic sampling

3. Stratified sampling

4. Cluster sampling

4. Trial and error method

Trial and error method is fundamental method of problem solving.

It is characterized by repeated, varied attempts which are continued until
success, or until the user stops trying. This approach is used most
successfully with simple problems and in games. It is possible to use the
trial and error method to find all solutions or the best solution, when a
finite number of possible solutions exist.
The examples of trial and error are as:
 Trial and error has traditionally been the main method of finding
new drugs, such as antibiotics.
 Trial and error is also commonly seen in player responses to video
games - when faced with an obstacle or boss, players often form a
number of strategies to surpass the obstacle or defeat the boss, with each
strategy being carried out before the player either succeeds or quits the
game.
Question 2:

Chameli and Babita have known each other since school. Two years
ago they entered the same university and today they are taking
undergraduate courses in the business school. Both hope to graduate with
degree in finance. In an attempt to make extra money and to use some of
the knowledge gained from their business courses, Chameli and Babita
have decided to look into the possibility of starting a small company that
would provide word processing services to students who needed term
papers or other reports prepared in a professional manner. Using a
systems approach, Chameli and Babita have identified three strategies.
Strategy 1 is to invest in a fairly expensive microcomputer system with
high quality laser printer. In a favorable they should be able to obtain a
net profit of Rs. 10,000 over the next two years. If the market is
unfavorable they can lose Rs.8,000. Strategy 2 is to purchase a less
expensive system, In a favorable they should be able to obtain a net profit
of Rs. 8,000 over the next two years. If the market is unfavorable they
can lose Rs.4,000. Their final strategy, strategy 3 , is to do nothing.
Chameli is basically a risk taker, whereas Babita tries to avoid risk.

(a) What type of decision procedure should Chameli use? What would
Chameli decision be?
(b) What type of decision maker is Babita ? What decision would Babita
make?
(c) If Chameli and Babita were indifferent to risk, what type of decision
approach should they use? What do you recommend if this were the case?

Answer:
1) As Chameli is a risk taker she can use Optimistic model.

The strategies are as:

a) Strategy 1- Invest in a fairly expensive microcomputer system with
high quality laser printer.
b) Strategy 2- Purchase a less expensive system.
c) Strategy 3- Do nothing.

State of nature
Alternatives Favorable Unfavorable
market(Rs) market(Rs)
Strategy 1 10,000 -8,000
Strategy 2 8,000 -4,000
Strategy 3 0 0

As Chameli is a risk taker,

Max (row’s max) = (10,000, 8,000, 0)

= 10,000

So, Chameli should select strategy 1 which is to invest in a fairly

expensive microcomputer system with high quality laser printer which
gives the profit of Rs. 10,000 monthly.
2) As Babita prefers to avoid risk she can use Pessimistic model.

The strategies are as:

a) Strategy 1- Invest in a fairly expensive microcomputer system with
high quality laser printer.
b) Strategy 2- Purchase a less expensive system.
c) Strategy 3- Do nothing.

State of nature
Alternatives Favorable Unfavorable
market(Rs) market(Rs)
Strategy 1 10,000 -8,000
Strategy 2 8,000 -4,000
Strategy 3 0 0

As Babita prefers to avoid risk,

Max(row’s min) = (-8,000, -4,000, 0)

= 0

So, Babita should select strategy 3 which is to do nothing.

3) If Chameli and Babita were indifferent to risk, the should use Minimax
regret procedure.
 Determining opportunity loss for Thompson Lumber.

State of nature
Favorable market(Rs.) Unfavorable market(Rs.)
10,000-10,000 0-(-8,000)
10,000-8,000 1-(-4,000)
10,000-0 0-0

State of nature
Alternatives Favorable Unfavorable
market(Rs) market(Rs)
Strategy 1 0 8,000
Strategy 2 2,000 4,000
Strategy 3 10,000 0

State of nature
Alternatives Favorable Unfavorabl Maximum in
market(Rs) e row(Rs.)
market(Rs
 )
Strategy 1 0 8,000 8,000
Strategy 2 2,000 4,000 4,000
Strategy 3 10,000 0 10,000

Minimax regret = Rs. 10,000

So, If Chameli and Babita were indifferent to risk, their decision shall be
strategy 2 which is to purchase a less expensive system.