Forecasting Techniques

Question 1

What purpose does probability analysis serve?

Answer 1

It evaluates the likelihood of a specific event occurring when several outcomes are possible; the probability of a particular outcome is always between 0 and 1 (never and always); the sum of the probabilities associated with the possible outcomes is always 1.

Question 2

Define “joint probability”.

Answer 2

The probability of an event occurring given that another event has already occurred. The joint probability is determined by multiplying the probability of the first event by the conditional probability of the second event.

Question 3

What does the correlation coefficient ® measure?

Answer 3

Measures the strength of the relationship between the dependent and independent variable. The correlation coefficient can have values from -1 to 1.

Question 4

Define “expected value”.

Answer 4

The long-run average outcome; determined by calculating the weighted average of the outcomes (multiply the value of each outcome by its probability and then sum the results).

Question 5

Describe the cost equation necessary for the calculation of regression or the high-low method.

Answer 5

The relationship between fixed costs, variable costs, and total costs expressed as a regression equation:
y = A + BX
where:
y = total costs (dependent variable)
A = fixed costs (the y intercept)
B = variable costs per unit (the slope of the line)
X = number of units (independent variable)
or Total Costs = Fixed Costs + (Variable Cost per unit x Number of Units)

Question 6

What does the coefficient of determination (R2) indicate?

Answer 6

Indicates the degree to which the behavior of the independent variable predicts or explains the dependent variable. The coefficient of determination is calculated by squaring the correlation coefficient. R2 can take on values from 0 to 1.