Category Archives: Paid Content

Solution to Management Science Series #220: Another real-world example: Average time spent on childcare by fathers of Arkham Island

Average time spent on childcare by fathers of Arkham Island

A recent study claims that the time fathers spend on childcare is 7.1 hours per week. Drawing on this survey, your company needs to prove true that the time fathers living on the Arkham Island spend on childcare per week differs from that value. Your company, ‘Wizard Statistics’, sampled 50 fathers and recorded the number of hours per week spent on childcare. The sample information is shared in the accompanying Excel worksheet.

a)Using hypothesis testing, determine whether the time fathers living on the Arkham Island spend on childcare per week differs from 7.1 hours per week. Use significance levels of 5% and 10%. Solve the problem manually.

b) Solve the same problem, using Excel.

Solution to Management Science Series #219: Another real-world example: Tindendo considering changing its suppliers

Tindendo is a famous video game console manufacturer based in Kagoshima, Japan. Tindendo uses a very specific chip for its consoles currently in the market. However, Tindendo plans to research other possible suppliers that could provide these chips at least in the same quality as that ensured by the incumbent supplier.

To that end, Tindendo has found an alternative supplier. Tindendo randomly sampled 50 parts from both the incumbent and the alternative supplier and came up with a methodology and proprietary technology that could measure by how much each part deviates from the required specification.

Although switching costs are high for this particular part, Tindendo determined that they could work with the alternative supplier if the average deviation from the standard required measures for the incumbent supplier were to be 5 nanometers or higher than that for the alternative supplier.

The average variation for the samples supplied by the incumbent supplier is 54 nanometers with a standard deviation of 9 nanometers. The average variation for the samples supplied by the alternative supplier is 48 nanometers with a standard deviation of 7 nanometers.

a) Should Tindendo change its supplier if it were to use a level of significance of 5%?

b) Assume that Tindendo determined that it could work with the alternative supplier if the average deviation from the standard required measures for the incumbent supplier were to be 2 nanometers or higher than that for the alternative supplier. Should Tindendo change its supplier if it were to use a level of significance of 5%?

c) Assume that Tindendo decided to change suppliers provided that the average variation amount for the incumbent supplier is higher than that for the alternative supplier by any amount. Without calculating anything algebraically, could you determine what Tindendo should do in that case (all other inputs values stay the same)?

Understanding Economic and Financial Data 🧮

This has been going unnoticed by some.

In finance and economics, many times, for the untrained eye, nothing seems to be happening.

For the trained eyes, many things are brewing and building up if not completely happening.

Every financial downturn in the past occurred in the same pattern although the underlying fundamentals might be different: Nothing happens and then everything happens!

Furthermore, charts or data you follow may appear to be random in isolation, but in conjunction, metrics monitored and measured exhibit either causality or correlation, providing meaningful insights.
In this article, I expand on some important financial metrics and what kinds of signals they disseminate. I’ll analyze them in isolation first and then in combination. I’ll also establish the relationship among fundamental metrics, deciphering what all of that means for an ordinary investor. I’ll try to corroborate the reality of financial markets, which is that nothing appears to be happening while something underneath is brewing and yet it has always been very hard to predict when a bubble will burst or a crisis comes forth.

On Spin-offs Both Disrupting and Buttressing Their Originators: Journey of Global Distribution Systems and Credit Card Companies

Business world is a strange one. It is a realm in which companies can build disruptors and spin them off; not to compete with them but buttress their core operations. In this article, I analyze disruptors created by large incumbents that would support the incumbents in the long-run. Starting with the GDS business and segueing into credit card companies, I will scrutinize how these businesses came into being in the first place, how they are doing now fiscally and financially, and what the future holds for them.

Solution to Management Science Series #218: Real world example: Interactive Investors Asset Trading Platform

Interactive Investors Asset Trading Platform

Interactive Investors is a well-known asset trading platform used by the citizens of Eldorado. The company plans to improve the platform by adding a feature that would expedite the transaction times.

The company randomly sampled 64 trades and had the new improved platform used for all these transactions. The average transaction time is found to be 25 milliseconds with a standard deviation of 4 milliseconds.

1. Establish the null and alternative hypotheses if Interactive Investors wants to prove whether the average transaction time is different from 28 milliseconds (the average transaction time prior to the change)?

2. Establish the null and alternative hypotheses if Interactive Investors wants to demonstrate whether the average transaction time is less than 28 milliseconds.

3. What should Interactive Investors do if it were to use a level of significance (α) of 0.01 in question 1.

4. What should Interactive Investors do if it were to use a level of significance (α) of 0.01 in question 2.

5. Determine the critical values of the sample mean both of which will cause the alternative hypothesis to be accepted in 1. Use a level of significance (α) of 0.01.

6. Determine the critical value of the sample mean which will cause the alternative hypothesis to be accepted in 2. Use a level of significance (α) of 0.01.

7. How could Type I and Type II errors happen in the context of this problem?

Retire or not to retire: A blueprint laying out the fundamentals of bond valuation, investments in bonds, and recording economic gains accordingly

Your company has a great reputation among lenders as you have never defaulted on your debt commitments.
Your company is so solid that even your zero-coupon bonds are in high demand for many fixed-income investors.
Currently, prevailing market rates are on the rise.
Your company’s financial managers are contemplating retiring all these bonds and some vehemently insist that now is the time to retire.
Will there be any differences in economic gains between retiring at the maturity and retiring now while the rates are way lower than when you issued the bonds initially?
In this article, I will answer this question and elaborate on the fundamentals of bond valuation. I will also provide a real-world example in which a company chooses to retire its bonds, demonstrating how this operation will affect the company’s financial statements and whether the company really needed to retire the bond to record an economic gain.

Solution to Management Science Series #217: Real world example: Mushroom Kingdom Social Network

Serra, a video game and console collector, plans to launch a digital forum, which would resemble a social network only for people who collect video games and consoles.

She wants to name it ‘Mushroom Kingdom Social Network’. Albeit optimistic about the prospects of this new venture, Serra still wants to test whether it is a viable business proposition.

So, she randomly samples 50 collectors and asks them how much time each day they would spend on such a social network. The average value measured through this sample is 53 minutes and the standard deviation is calculated as 23 minutes.

a) State the null and alternative hypotheses if Serra wants to demonstrate whether the amount of time spent on this platform is different from 45 minutes per day.

b) Construct the null and alternative hypotheses if Serra wants to test whether the average amount of time spent on the proposed network is more than 45 minutes per day.

c)What should Serra do if she tests the hypotheses laid out in a), requiring a level of significance of 0.05?

d)What should Serra do if she tests the hypotheses laid out in b), requiring a level of significance of 0.05?

e) Which pair of hypotheses are more conservative, a) or b)?

Now, Serra decides to sample only 40 people randomly.

f)What should Serra do if she tests the hypotheses laid out in a), requiring a level of significance of 0.05?

g)What should Serra do if she tests the hypotheses laid out in b), requiring a level of significance of 0.05?

Chart of the Day Vol.1: Removing the chaff from the wheat in different investment vehicles

The ability to distinguish between the noise and the signal is a rare skill within the confines of the financial markets and investment world. In our modern times, there is too much emphasis on the stock market while this particular market may tend to disguise macroeconomic realities, especially when isolated in the broader context of indices. Especially for a retail investor, there are many other investment vehicles ranging from physical assets such as real estate and precious metals to commodities and other diversified portfolios the underlying assets of which may still be the physical assets. In this article, I will introduce other important financial markets that will be utilized as reliable proxies to understand current market conditions and are generally ignored by retail investors. In these perilous times, ignoring these fundamental markets and solely focusing on stocks may ruin your wealth and derail your plans to financial freedom. The content can also be used as a blueprint for understanding different set of investment vehicles and comprehending the fundamental differences between markets, as well as increasing your financial acumen with respect to removing the noise from the signal.

Solution to Management Science Series #216: Should Condor launch a new website?

An online video games store named ‘Condor’ needs to test its old and new web designs. Condor randomly redirects a sample of customers to either site and measures the sales information of customers who purchase.

Condor will launch the new website only if it is 90% confident that the new site generates more sales per transaction (i.e. average transaction amount) than the old website.

Below are shared the data for the sample of customer transaction amounts from the new site and that from the old site.

a) Could you make an educated guess on what Condor should do without calculating anything?

b) Design a hypothesis test and determine whether Condor should roll out the new website.

c) Solve the same problem by using Excel.

On economics you have been taught wrong 🧭

Unfortunately, the dismal science taught in our schools and universities rests on many blatantly wrong assumptions.
From the definition and calculation of inflation to investment management and worshipping only a small subset of assets while ignoring those that would lead to greater financial freedom, the economics, as a subject, is losing ground while being mired in farfetched quant analyses and losing its connection with the realities of daily life and our changing world.
In this article, I elaborated on the most common misconceptions that are being perpetuated through the teaching of economics. The reality appears to be quite different from what you are being told every day.