IDP, Quantitative Methods and Business Forecasting

Lab Homework #3 due on Nov 23rd in hard-copy form but you can send
your models in Excel to my e-mail. Lab HW #2 will help you study for the
mid-term, so please do a good job.
40 points
Name Parth Trivedi
Name of Persons Worked With_________________________

1. Using Excel Add-in Data Analysis and the following data:

X = Years with
company
6
12
14
6
9
13
15
9

Y = Shares of company
stock
300
408
560
252
288
650
630
522

a. What are the measures of central tendency and the standard deviation for both
the X and Y data?
b. What is the correlation between X and Y?
c. Create a Scatter Diagram for these data.
d. How would you describe this correlation?
e. Run the slope-intercept regression forecast and predict shares of stock for
employees at 8 & 17 years of service with the company. Is slope-intercept one of
the best methods to use in this case?
f. Why would someone want to forecast this information, for what purpose?
2. 1. Data collected on the yearly demand for 50-pound bags of fertilizer at
Sunshine Garden Supply are shown in the following table.
Year
2001
2002
2003
2004
2005
2006
2007

Demand for Fertilizer (1,000s

of Bags)
4
7
5
5
10
7
8

2008
2009
2010
2011

9
11
14
15

a. Develop a three-year moving average and to forecast sales in year 2012

b. Develop a 3-year double-weighted average to predict demand in year 12. Sales in
the most recent year is given a weight of 2 and sales in the two years prior to that
are each given a weight of 1.
c. Now integrate and add a slope in conjunction with your 3 year weighted moving
average to forecast demand again for year 2012.
d. Develop a regression/trend line to estimate the demand of fertilizer in year 12.
e. Is there anything "wrong" with the data that could be adjusted? Develop a Fast
Moving Average that eliminates the data for 2005.
f. Based on the forecasts you have created, which forecast do you think will
probably be the most accurate?
3. The following table gives the average monthly exchange rate between the U.S.
dollar and the euro for 2008. It shows that 1 euro was equivalent to 1.210 U.S.
dollars in January 2008.
Month
January
February
March
April
May
June
July
August
September
October
November
December

Exchange Rate
1.210
1.194
1.203
1.227
1.247
1.266
1.268
1.281
1.273
1.262
1.289
1.320

a. Develop a trend line that could be used to predict the exchange rate for
2009.
b. Run the regression and relevant charts and diagrams. Identify the slope,
intercept, R Squared, T-statistic.
c. c. Predict the exchange rate for January 2009 and February 2009.

4. Normal Distribution Forecast with NORMINV function.

The time required to complete a project is normally distributed with a mean of 80
weeks and a standard deviation of 10 weeks. The construction company must pay
a penalty if the project is not finished by the dues date of the contract. If a
construction company bidding on this contract wishes to be 90 percent sure of
finishing by the due date, what forecasted due date (project week #) should be
negotiated?
*Use the Normal Distribution forecast method. This forecast method can be used
when the data is normally distributed and the mean & standard deviations are
known and tracked over time.
Hint: you might want to use your NORMINV function in Excel or the formula for the
Probability Forecast Method:
P(x)

= z() +

Z-Score Table

Probability
mean
standard
NORMINV

90%
1.645
1.28

so we round up

0.9
80
10
92.82
93
weeks

Probability
mean
standard

0.95
80
10

Norm

96.45
97
weeks

so we round up

95%
1.96
1.645

99%
2.61 (2 tail)
2.35 (1 tail)

5. You are planning a trip to Las Vegas and want to study basic probability in order
to increase your odds of winning. You have decided to play cards, flip coins, shoot
craps, and play roulette.
a) If a normal coin is tossed, what is the probability that you will flip two heads
in a row?
b) If three coins are tossed, what is the probability of at least one tail?
c) If a fair dice is rolled, what is the probability of getting a 5?
d) If a fair dice is rolled, what is the probability that the number is less than 3?
e) If two fair dice are rolled, what are the total outcomes possible?
f) What is the probability of shooting a 7 or 11 on your first come out roll in
craps? *
In craps you win on the first roll if you get 7 or 11, you lose crap out if you
roll a 2, 3 or 12.
What is the probability that you will lose?
g) In a normal deck of 52 playing cards shuffled correctly, what is the probability
of picking a face card?
h) In a normal deck of 52 playing cards shuffled correctly, what is the probability
of picking two face cards in a row without replacement?
i) In a normal deck of 52 playing cards shuffled correctly, what is the probability
of picking a heart?
j) In a normal deck of 52 playing cards shuffled correctly, what is the probability
of picking a second heart after youve picked the first and you did not
reshuffle that second time?
k) In a normal deck of 52 playing cards shuffled correctly, what is the probability
of picking a black 2?
l) In roulette, what is the probability of getting a black number?
m) In roulette, what is the probability of getting a number in the first column?
6) Create a time series charts and identify trends using figures on page (34-43)
of your text as a guide that includes the following data, applications, and
analysis in Excel:
a. Trend line
b. Trend function
c. Identify slope and intercept
d. Descriptive statistics: does it lag in data that has a strong trend?
e. Regression run
f. Test for significance
g. Slope/intercept forecast for at least 2 more periods in the future
h. Moving average forecast: simple, fast, double-weighted.
i. Seasonal component
7) Print 2 stock charts from the follow list that show moving averages of 20 and
50 days and 50 and 200 days. Benchmark these against the S&P or the
NASDAQ. Whats the trend telling you? Bullish, Bearish, upward sloping,
downward sloping, no direction
Examples below but youre free to use your own companies:

Moving average of 20 and 50 days

For moving average 20 to 50 days we can see an golden cross in the end
Moving averages of 50 days and 200 days

For moving average of 50 to 200 days we can see a death cross

Moving average of 20 days 50 days

Moving average of 50 to 200 days

Tech Stocks: MSFT, HPQ, CSCO, AAPL, ORCL, CRM

Cyclical Commodities: X, CX, PHM, AUY,SLV, MOO
Financial: GS, C, BAC, JPM
Energy: XOM, CVX, HERO,COP
Consumer: SWY, JNJ, WMT, NFLK
Health Care: BAX, MRK, XNPT, PFE
INDUSTRIAL: GE, BA, F,CAT

8) In stock trading, trend forecast, and investing, whats the difference between
fundamental analysis and technical analysis? Explain following terms mean in
your essay.
Support lines
Resistance lines
Breakout
Gap ups and downs
Trend lines
Reversal
Moving Averages: 5 vs. 20 day moving average, 20 day vs. 50 day moving
average; 50 vs. 200.
Bounce off the 50, 100, or 200 day moving average.
Head and Shoulders charts
Relative Strength Index or RSI
If you were interested in the stock market, which type of investor would you
be: a fundamental, technical, or combination investor? Why? There are some
excellent videos on "basic" technical analysis and tons of information on the
web.
Fundamental analysis and technical analysis are two different types of analysis.
They are two different types of methods used for researching and forecasting future
price and performance of stocks. Both types of analysis are different from each
other.
Value investors follow fundamental analysis. In fundamental analysis you value
securities by valuing the companys true value, including assets both tangible and
intangible .in this type of analysis people study everything based upon the company
from internal to external factors.
Technical analysis is pure type of forecasting technique as it does not take firm
intrinsic value but it studies the past trends and past prices with volume. It basically
studies past performance of stock price and tries to find a trend and estimate the
future performance.

Support lines- support lines are used in technical analysis and it is a type
of line on a graph which supports the lowest price of share. For example if
we graph the price of stock on a graph and if we notice the lowest prices
over the years we would notice that the support is the lowest price and

the stock price doesnt go below it. Mostly if a person is bullish about a
stock price it is desirable to buy it at the support.
Resistance lines resistance line is a type of method which is also used in
technical analysis. Resistance level indicates that the stock or index is
finding it difficult to break through it. It is opposite of support as support is
lowest the resistance is the highest level of stock price. If an investor
thinks that the stock price is finding it difficult to break the resistance than
he would sell off as its the best price what he could get.
Breakout In simple terms means that when a price of share breaks
resistance lines. It basically means that when a stock price increase its
resistance the trader will try to sell it. It mostly happens when volatility is
increased.
Gap ups and downs Gap in simple terms mean that when no trading
takes place. It is a type of technical analysis chart. Gap up and down
means when a stock makes moves to upwards or downwards with no
trading in-between.
Trend lines when an investor graphs all the prices of a stock over a
period of time is called trend line. It is important as it helps an investor to
understand the movement of stock over a period of time and it is very
much useful in forecasting.
Reversal when a price line changes a direction and it flips itself its called
reversal. For example if in a graph when an uptrend, which is a series of
higher highs and higher lows, reverses into a downtrend by changing to a
series of lower highs and lower lows is called reversal.
Moving Averages: 5 vs. 20 day moving average, 20 day vs. 50 day moving
average; 50 vs. 200. moving averages is an indicator of average prices
of and indicator over a period of time. When we see a data its very
fluctuating. So moving average helps in smoothing the data. It helps in
creating a trend line. Length of moving averages depends upon the
objective of analysis. Short term moving averages are best suited for short
term trends. 5 day moving average gives indication of short term prices
for 5 days. It is easier to calculate but the volatility is very high and not
clear to predict. 20 days moving average is considered as medium term
trends. When a system is using a 5 vs 20 days moving average it is
considered as short term. A system using 20 vs 50 day moving averages
is considered as medium term and a system using 50 vs 200 day moving
averages is considered as long term. Mostly conservative and cautious
investors use 50 vs 200 days moving averages. Moving averages with
short term will respond quicker to price change.

Bounce off the 50, 100, or 200 day moving average.

Head and Shoulders charts head and shoulders chart is one of the most
popular types of charts in technical analysis. The pattern on chart looks
like a head with two shoulders. This means that the middle portion is at
highest peak and the side two portion which looks like shoulders to the
head. It is a reversal pattern type of chart.

Relative Strength Index or RSI it is used to find the strength of a stock to

determine the strength of a stock. It is used to check weather a stock is
over sold or under bought. It gives an indication of when to buy or to sell a
stock. It measures socks directional price movements. Formula for RSI is
as follows:
RSI = 100 - 100/(1 + RS*)

I would personally be an technical investor as even though different types of

investing approach has different types of assumptions and theories but I like this
type of approach only because I firmly believe that history tends to repeat itself. So
when we analyze the past prices with the trends (moving averages, trend line etc)
we could get an estimate of future prices. Moreover apart from exogenous events
fluctuations the price moves in trends. One of the major problem with this type of
approach is that it only looks at price and movement excluding the companies
fundamental factors but I believe that the price already is shifted by this factors so
this is most suitable type of approach for me.
Reference :
http://www.investopedia.com/
stockcharts.com
yahoofinance.com