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Midterm Game 1 Part Iv Problem Solving
Midterm Game 1 Part Iv Problem Solving
In Partial Fulfillment
of the Course Requirement in
MSC560M-G02
Quantitative Methods for Decision Making
Term 3, A.Y. 2020-2021
Submitted by:
Group 1 and 3
Bautista, Anna Mae
Baylon, Johanna Lyn
Jiang, Mingli
Paraiso, Meryll Monica
Santos, Aeron Joseph
Submitted to:
Dr. Dennis Berino, DBA
Date:
07 August 2021
1. Forecasting
1.1 Forecast stock index for period 11 using the following approaches. Interpret
fully the results for each computation.
Moving average base 2 (a) 15,208.5 374.38 2.52% 202,159 313.25 519.18
Moving average base 3 (a) 15,062 451.33 3.041% 279,644 435.24 625.70
Simple exponential smoothing with 14,937.15 474.05 3.186% 331,099 470.05 652.46
alpha = 0.3 (b)
Simple exponential smoothing with 15,348.2 316.34 2.13% 161,166 266.70 455.21
alpha = 0.7 (b)
Time series regression (c) 15,608.33 191.72 1.316% 47,061 -0.001 242.54
(Please refer to appendix for QM for Windows Solutions)
Among the five approaches, the one that would provide the best forecast is the
time series regression as it yields the lowest MAD, MAPE, MSE, Bias and Standard
Error.
1.2 Develop a regression model to predict the price of Stock A based on the Stock
Index. Interpret fully the results of your computations.
The regression model developed to predict the the price of Stock A based on the
Stock Index is:
𝑌 = 51. 207 +. 0𝑥
With a correlation coefficient of 0.107, this model indicates that changes in the
Stock Index barely affects the price of Stock A.
1.3 Develop a regression model to predict the price of Stock B based on the Stock
Index. Interpret fully the results of your computations.
The regression model developed to predict the the price of Stock A based on the
Stock Index is:
𝑌 =− 47. 217 + . 006𝑥
With a correlation coefficient of 0.967, this model indicates that as the Stock
Index rises, so does the price of Stock B and vice versa.
1.4 Which of the two stocks’ performance is explained better by the Stock Index.
Cite reasons for your answer.
Among the two stocks, Stock B’s performance is explained better by the Stock
Index as its correlation coefficient of 0.967 is higher than that of Stock A which is 0.107.
Correlation coefficient is a measure that quantifies the strength of the linear relationship
between 2 variables - the closer this value to 1 indicates a positive linear relationship
between the 2 variables. Thus, as the Stock Index rises, so does the performance of Stock
B.
1.5 Identify three (3) other variables other than Stock Index which can be used to
predict the stock price performance. Give a short explanation for this.
B. Volume
Volume measures the number of shares traded in a stock or contracts
traded in futures or options. Volume can be an indicator of market strength, as
rising markets on increasing volume are typically viewed as strong and healthy.
When prices fall on increasing volume, the trend is gathering strength to the
downside.
C. Book Value
The book value denotes the intrinsic value of the company. Value investors
rely on this information to assess the should-be value of stocks and determine
whether stocks are overvalued or undervalued.
D. Market Capitalization
Investors can use market capitalization to assess the value of a stock they
are considering buying. Market capitalization is a key measure of profitability that
is also used in equations to determine price-to-earnings and other significant
metrics.
Ethical Considerations
A. Insider Trading
Is a practice of purchasing or selling stocks while in possession of privileged
information that is not yet available to the public. This material non-public information
may significantly affect the prices of the stock price and provide unfair advantage to the
trader against the other inventors and make potentially larger, unfair profits.
C. Short Selling
Is the practice of selling borrowed stocks at a high price, hoping to make a profit
by purchasing them at a lower price than selling at a later date. The main ethical concern
is that short selling can cause significant market declines and that investment firms profit
when companies fall in value. Short selling is often associated with lurid headlines
predicting corporate failure, market abuse, and policymakers’ concerns that the practice
undermines financial markets.
2. Decision analysis
2.1 What is the best action plan for the company under the following:
No Facility 0 0 0 0 0
a. Maximax. Under the maximax criterion, a large facility will be built with
the highest expected profit of 500,000 out of all the alternatives.
b. Maximin. Under the maximin criterion, no facility will be built as it yields
the least possible loss among the alternatives.
c. Equally Likely. Under the equally likely approach, a medium facility will
be selected as it yields the highest expected monetary value of 140,000.
d. Realism.
i. Alpha at 0.3. With an alpha of 0.3, a medium facility will be built as
it yields the best payoff among the alternatives of 50,000.
ii. Alpha at 0.8. With an alpha of 0.8 which is leaning on the optimistic
outlook, a large facility will be built as it yields the best payoff
among the alternatives of 338,000.
2.2 The company was able to determine the probability of occurrence of the
market condition as follows: strong at 50%, fair at 30%, and poor at 20%. What is
the best decision for the company? (please refer to appendix for QM outputs)
Using the expected value approach, the company should build a large
facility as it has the highest expected value at 218,000 among all the alternatives.
For the company, the value of perfect information is 68,000, which is the
variance of the perfect probability of 286,000 and the best expected value
of 218,000. Using this information, the company can set a limit of 68,000
as to the amount they will pay to acquire the perfect information. In the
event that the company will be able to acquire perfect information at less
than 68,000, this will yield to profit and vice versa.
2.3 Suppose the probabilities are changed as follows – strong is 30%, fair is 50%
and poor is 20%. Use decision trees to find the best solution for the company.
Compare with the result in 2.2. (please refer to appendix for QM for Windows outputs)
With the following change in the occurrence probabilities of each result, the best
decision the company could make also changed from opening a large facility to
opening a medium facility instead.
Ethical Considerations
A. Environmental responsibility
Every business owner is responsible for the carbon footprint of his company. This
applies to how your business affects air quality, water cleanliness, the safety of
endangered species, the use and protection of other natural resources, the pristine nature
of protected nature reserves, and so on. Therefore, the equipment invested by the factory
must meet the environmental protection requirements, reduce energy consumption, and
reduce the impact on global warming.
B. Health and safety
Few ethical issues in business are more serious than the health and safety of your
employees and customers. In addition to the obvious moral impact of people being
injured or ill while working for your business, your business's financial stability and
reputation are also at great risk. Therefore, when considering the invested facilities, the
company needs to put the safety impact of the facilities on relevant personnel first and
choose safe and healthy facilities.
C. Accounting Practices
Any organization must maintain accurate bookkeeping practices. “Cooking the
books”, and otherwise conducting unethical accounting practices, is a serious concern for
organizations, especially in publicly traded companies. Even small privately held
companies must keep accurate financial records to pay appropriate taxes and employee
profit-sharing, or to attract business partners and investments.
3. References
Team, T. I. (2021, June 9). Company earnings and EPS: Everything investors need to
know. Investopedia. https://www.investopedia.com/articles/basics/03/052303.asp.
Mitchell, C. (2021, July 27). How to use volume to improve your trading. Investopedia.
https://www.investopedia.com/articles/technical/02/010702.asp.
Beattie, A. (2021, January 14). What book value means to investors. Investopedia.
https://www.investopedia.com/articles/fundamental-analysis/09/book-value-basics.asp.
Team, T. I. (2021, July 21). How can i use market capitalization to evaluate a stock?
Investopedia.
https://www.investopedia.com/ask/answers/042415/how-can-i-use-market-capitalization-ev
aluate-stock.asp.
Shabat, B. (2021, January 7). 8 Common Ethical issues Facing Businesses in 2020 |.
Become. https://www.become.co/blog/ethical-issues-businesses/