Question

What are the applications of statistical interference in finance and business which you may use the concept of confidence interval and hypothesis test. Give an example of problem and also include the brief introduction about the problem, the process to solve the problem, critics on the approach, and so on.

Answer 1

Ans:- Before we start the applications of statistical interference in finance and business, we need to understand the concept of confidence interval and hypothesis test which is described as follow:-

1. Confidence interval :- It measures the degree of uncertainty or certainty in a sampling method. A confidence interval can take any number of probabilities with the most common being a 95% or 99% confidence level.

2. Hypothesis test :- It is a mathmetical tool for confirming a finanicial or business claim or idea. Calculations are performed on selected samples to gather more decisve information about the characteristics of the entire population.

Hypothesis testing is useful for investors trying to decide what to invest in and whether the instrument is likely to provide a satisfactory return.

Despite the existence of different methodologies of hypothesis testing the same following for stepts are used:-

a) Define the hypothesis

b) Set the criteria

c) Calculate the Statics

d) Reach a conclusion.

Here is a simple example to understand the above:

A school teacher reports that students in her school score an average of 8 out of 10 in exams. To test this hypothesis, we record marks of say 60 students (sample) from the entire student population of the school (say 600) and calculate the mean of that sample. We can then compare the (calculated) sample mean to the (reported) population mean and attempt to confirm the hypothesis.

Now let's move towards the applications:-

The field of statistics has numerous applications in business. Because of technological advancements, large amounts of data are generated by business these days. These data are now being used to make decisions. These better decisions we make help us improve the running of a department, a company, or the entire economy.

“Statistics is extensively used to enhance Business performance through Analytics”

In the field of Business & finance, Uncertainty is the hallmark of the financial world. All financial decisions are based on “Expectation” that is best analysed with the help of the theory of probability and statistical techniques. Probability and statistics are used extensively in designing of new insurance policies and in fixing of premiums for insurance policies. Statistical tools and technique are used for analysing risk and quantifying risk, also used in valuation of derivative instruments, comparing return on investment in two or more instruments or companies.

Beta of a stock or equity is a statistical tool for comparing volatility, and is highly useful for selection of portfolio of stocks.

The major function of business is marketing which is all about creating and growing customers profitably. Statistics is used in almost every aspect of creating and growing customers profitably. Statistics is extensively used in making decisions regarding how to sell products to customers. Also, intelligent use of statistics helps managers to design marketing campaigns targeted at the potential customers. Marketing research is the systematic and objective gathering, recording and analysis of data about aspects related to marketing.

Use of Statistics is indispensable in forecasting sales, market share and demand for various types of Industrial products.

Factor analysis, conjoint analysis and multidimensional scaling are invaluable tools which are based on statistical concepts, for designing of products and services based on customer response.

The field of operations in business is about transforming various resources into product and services in the place, quantity, cost, quality and time as required by the customers. Statistics plays a very useful role at the input stage through sampling inspection and inventory management, in the process stage through statistical quality control and six sigma method, and in the output stage through sampling inspection.

Human Resource departments are inter alia entrusted with the responsibility of evaluating the performance, developing rating systems, evolving compensatory reward and training system etc. All these functions involve designing forms, collecting, storing, retrieval and analysis of a mass of data. All these functions can be performed efficiently and effectively with the help of statistics.

Information Technology (IT) and statistics both have similar systematic approach in problem solving. IT uses Statistics in various areas like, optimisation of server time, assessing performance of a program by finding time taken as well as resources used by the Program. It is also used in testing of the software.

Data Mining is used in almost all fields of business.

Now let’s discuss the areas of business, decision situations and the statistical techniques to resolve these situations:-

Area, Decision situation & statistical techniques:

1. 1. Marketing :

· Forecast of the demand of product & customer profiling market research: Time series, correlation and regression, Cluster analysis, conjoint Analysis etc.

2. Finance :

· Evaluation of Investment, Volatility of stocks, predicting EPS, Derivatives: Regression analysis, Decision Analysis, Beta Analysis etc.

3. Operations :

· Controlling & improving production, process and quality, Inventory Management: Statistical quality control, Six sigma, Sampling inspection, ABC Analysis etc.

Hence, Statistical tools such as hypothesis testing, confidence interval & other forcasting & sampling tools helps business to enhance its performance and achieve its overall objective.