IMC Unit 2

What's primary data

Data collected BY AN INVESTIGATOR with a SPECIFIC PROJECT in mind

What's Secondary data

Data collected BY SOMEONE ELSE for some other purpose

What's a population

All members of a defined group

What's a Sample

A subset of a population

What is the frequency of data in a histogram

Area of the bars

What are the types of sample

Random - each member of the population has an EQUAL CHANCE of being selected)

Non random – a selection criteria is used

What is systematic sampling?

A method where you select every k-th element from a population

What is stratified sampling?

Population is divided into subgroups and random samples are taken from each subgroup.

What's Discrete Data

Can only take certain values

What's Continuous Data

Can take any value

How are Discrete Data and Continuous Data collected

Discrete data is COUNTED

Continuous data is MEASURE

What are the different measures of Central Tendency

Arithmetic Mean

Median

Mode

What does Geometric Mean calculate

Calculates the ‘average rate of change’

What is the formula for Geometric Mean

Remember that they are multiplied not added

Remember the 1 + r

What are measures of dispersion

• Standard deviation

• Range

• Interquartile range

• Percentile

What is standard deviation

Measures the VARIABILITY of a data set AROUND THE MEAN

What is step 1 of calculating Standard Deviation (of a Data Set)

What is step 2 of calculating Standard Deviation (of a Data Set)

What is step 3 of calculating Standard Deviation (of a Data Set)

What is step 1 of calculating Standard Deviation (of a Frequency Distribution)

What is step 2 of calculating Standard Deviation (of a Frequency Distribution)

What is step 3 of calculating Standard Deviation (of a Frequency Distribution)

What is step 4 of calculating Standard Deviation (of a Frequency Distribution)

What is a Range

Difference between the highest and lowest values in a data set

What is Interquartile Range

Represents the ‘middle 50%’ of a data set

Difference between the 1st and 3rd quartiles

What is true of Inter quartile range

A measure of distribution not dominated by extreme values

What is 1st Quartile defined as

Mid-point between the lowest value and the median

What is 2nd Quartile defined as

The median

What is 3rd Quartile defined as

Mid-point between the median and the highest value

Where is the mean in a normal distribution

At the centre

What does it mean that a normal distribution is perfectly symmetrical

50% of observations on each side of the mean

How many observations are within one standard deviation of each side of the mean

~ 2/3rds

How many observations are within two standard deviation of each side of the mean

~ 95%

How is the shape of a normal distribution curve determined

By the Mean and Standard Deviation

What is the relationship between Mean, Median and Mode in a positively skewed frequency distribution

Mode <Median < Mean

What is the relationship between Mean, Median and Mode in a negatively skewed frequency distribution

Mean <Median < Mode

What is Regression/ Least-Squares/ Correlation analysis

The derivation of an equation in which one of the variables (the dependent variable, Y) can be estimated from other variables (the independent variables, X

What does the Least-Square method create

A simple ‘regression line’ (linear bivariate regression line

Y = a + bX

How is the line derived in the Least-Square method

Minimises the sum of the squared errors

What are the uses of the Least-Squares method

Extrapolation: forecast values OUTSIDE the range of the sample

Interpolation: filling in values missing WITHIN

the range

What does it mean if values are correlated

Values that increase/decrease together are positively correlated

Values that diverge are negatively correlated

What is correlation co-efficient

How well a linear bivariate regression line summarises the data

A measure of how closely related two variants are

What is the formula for correlation co-efficient

What happens when price volatility increases over time

Correlation between securities increase

Example of how simple arithmetic indices are constructed

What is the equation for simple arithmetic indices

[(A + B) / Start Value) * Base] = Index Number

Example of how simple arithmetic indices can be rebased in a following time period

Do indices show percentage change or actual change

Percentage change

For a simple aritmetic index do all components have the same impact on value

Yes

What are the features of Geometric Indices

Less sensitive to changes in the price of constituents

Capital changes easy to accommodate

What is an example of a geometric index

Financial Times Ordinary Share Index (FT30)

What are the problems of Equally Weighted Indices (Why use Market Weighted Indices)

Give too much/little weight to companies, i.e. they are NOT REPRESENTATIVE of a whole market

Example of how Equally Weighted Indices are constructed

What is the equation for equally weighted indices

[(MV A + MV B) / Start Value] * Base = IndexNumber

MV no. of shares

Are all major indices total return indices

No

Are all major bond indices total return indices

Yes

What are some key UK equity market indices

FTSE100

• 100 largest UK companies

• Captures 70% of the value of UK listed shares

FTSE250

• The NEXT most valuable 250 UK companies (‘mid-cap stocks’)

FTSE All-Share

• Covers 98% of the UK stock market capitalisation

FT30

• Oldest UK index (set at 100pts in 1935)

What are some key US equity market indices

Dow Jones Industrial Average

• 30 largest industrial stocks on the NYSE and NASDAQ

• Calculation: unweighted arithmetic mean

Standard & Poor’s (S&P) 500

• 500 largest US companies

What is a German Key index

DAX

What is a Japan Key index

Nikkei 225

How is the Nikkei 225 calculated

unweighted arithmetic mean

What is the formula for Effective Annual Rate (EAR) Or Annual Percentage Rate (APR)

Where:

‘r’ = relevant periodic flat rate/number of periods

‘n’ = number of periods over which ‘r’ is compounded

How is Future Value calculated

How is Present Value calculated

How are Annuities calculated

A repayment mortgage of £100,000 is taken out over 25 years.

What is the annual repayment required at the end of each year if the rate of interest is fixed at 9%?

£10,181

What is the formula for calculating the future value of an investment under continuous compounding?

Remember its r not 1+ r

How are Perpetuities calculated

What is Net Present Value (NPV)

The present value of inflows less the present value of the outflows

What is Internal Rate of Return (IRR)

The discount rate that makes the present value of the inflows equal to the present value of the outflows (i.e. net present value of zero)

What is the Production Possibility Frontier

Describes the maximum quantities of goods produced using all available resources in an economy

What are the inputs in the Production Possibility Frontier

Labour

Land

Capital

What are factors affecting demand

• Complementary goods

• Substitute goods

• Consumer income

• Tastes

• Advertising

What does Price elasticity of Demand greater than one mean

Elastic demand

What does Price elasticity of Demand less than one mean

Inelastic demand

What does Price elasticity of Demand cause

Shift ALONG the curve

What is the formula for PED

(% change in quantity demanded)/(% change in price)

What is the elasticity of demand under perfect competition?

Infinity

What does positive Cross elasticity of Demand imply

substitute goods

What does negative Cross elasticity of Demand imply

complimentary goods

What does Cross elasticity of Demand cause

Shift IN the curve

What does a positive Income elasticity of Demand imply

normal goods

What does a Income elasticity of Demand greater than 1 imply

luxury goods

What does a negative Income elasticity of Demand imply

inferior goods (necessities)

What does Income elasticity of Demand cause

Shift IN the curve

What is Supernormal profit (Economic Profit)

Profit in excess of

• Measured costs

• Opportunity costs

Economic profit is calculated as:

Accounting profit minus the cost of the entrepreneur's time and capital

How do companies profit maximise

Firms will produce output until the level is reached where marginal cost and marginal revenue are equal

What is Economies of Scale

An lncrease inputs leads to a more than proportionate increase in output

What is the bottom of the Long Run average cost curve

The minimum efficient scale

Where is a firm’s optimal output

Q1 is optimal output

A is where MR = MC,

Where does a firm begin to experience diseconomies of scale

Q2

What is perfect competition

A market structure in which neither buyers nor sellers believe that they can influence the market price by any actions of their own Horizontal demand line (AR)

How do Buyers and Sellers view themselves in Perfect Competition

as Pricetakers

What are the characteristics of Perfect Competition

Homogeneous product

Large number of independent firms, each small relative to

Industry size

No barriers to entry or exit

Perfect information

Where is MR and AR in the short run in perfect competition

Equal to price

In the Short Run how does a firm in perfect competition decide whether to continue operating

We equate MR with SRMC, and check to see if this intersection is above the SRAVC curve

Why must Revenue be above Variable cost in perfect competition

A firm will only stay in business in the short run if it can at least cover its variable costs.

Where is MR and AR in the long run in perfect competition

Equal to Price

In the Long Run how does a firm in perfect competition decide whether to continue operating

If AR is below LRATC