ICAP PRC-2 Quantitative Analysis for Business flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Effective annual rate

The true annual cost or yield after compounding: EAR = (1 + r/m)^m − 1, where r is the nominal annual rate and m the number of compounding periods per year.

Break-even quantity

The output level at which total revenue equals total cost, calculated as fixed costs divided by contribution per unit (unit price minus unit variable cost).

Coefficient of variation

A unit-free measure of relative dispersion equal to the standard deviation divided by the mean, usually expressed as a percentage; used to compare variability across data sets.

Interquartile range

The difference between the third and first quartiles, Q3 − Q1. It measures spread of the middle 50% of observations and is resistant to extreme values.

Frequency density

Frequency divided by class width, plotted as the height of a histogram bar. When class widths differ, bar areas rather than heights represent the frequencies.

Pearson skewness coefficient

A measure of asymmetry equal to 3(mean − median)/standard deviation. A positive result indicates right skew; a negative result indicates left skew.

Mutually exclusive events

Events that cannot occur together, so their intersection has probability zero. Their combined probability is the sum of their individual probabilities.

Binomial distribution

A model for the number of successes in n independent trials with constant success probability p; mean is np and variance is np(1 − p).

Poisson distribution

A model for counts of rare events in a fixed interval, with P(X = r) = e^(−λ)λ^r/r!. Its mean and variance both equal λ.

Standard normal variable

A normally distributed variable with mean zero and standard deviation one, obtained by standardizing: z = (x − μ)/σ, allowing use of standard tables.

Laspeyres price index

A weighted price index using base-period quantities: Σ(p1·q0)/Σ(p0·q0) × 100. Because quantities are fixed, it tends to overstate price increases.

Paasche price index

A weighted price index using current-period quantities: Σ(p1·q1)/Σ(p0·q1) × 100. It tends to understate price increases relative to Laspeyres.

Fisher's ideal index

The geometric mean of the Laspeyres and Paasche indices. It satisfies both the time-reversal and factor-reversal tests, making it theoretically preferred.

Deflating a money value

Converting a nominal amount into real terms by dividing by a price index and multiplying by 100, expressing it in base-period purchasing power.

Centred moving average

A moving average positioned at the middle of its span. For an even period such as four quarters, two successive averages are averaged again to centre the result.

Seasonal index

A figure showing the typical seasonal effect for a period, derived by averaging actual-to-trend ratios and adjusting them to sum to the number of seasons times 100.

Exponential smoothing

A forecasting method where the next forecast is α times the latest actual plus (1 − α) times the latest forecast; higher α reacts faster to recent changes.

Mean absolute deviation

The average of the absolute differences between actual and forecast values. It measures forecast accuracy in the original units; lower values indicate better forecasts.

Coefficient of determination

The square of the correlation coefficient, r², giving the proportion of total variation in the dependent variable explained by the regression on the independent variable.

Regression line of y on x

The least-squares line y = a + bx with slope b = Cov(x,y)/Var(x) and intercept a = ȳ − b·x̄, used to predict y from x.

Spearman's rank correlation

A measure of association for ranked data equal to 1 − 6Σd²/(n(n² − 1)), where d is the difference between paired ranks.

Correlation versus causation

A strong correlation between two variables does not imply that one causes the other; a lurking variable may drive both, or the association may be coincidental.

Net present value

The sum of discounted future cash flows minus the initial outlay. A positive NPV means the project earns more than the required rate of return.

Internal rate of return

The discount rate that makes a project's net present value zero. A project is acceptable when the IRR exceeds the cost of capital.

Present value of an annuity

The value today of a series of equal payments: A·[1 − (1 + r)^(−n)]/r, where A is the payment, r the periodic rate and n the number of payments.

Sinking fund factor

The periodic deposit needed to accumulate one unit in n periods at rate r: r/[(1 + r)^n − 1]. It is the reciprocal of the future value annuity factor.

Expected monetary value

The probability-weighted average payoff of a decision alternative, computed as the sum of each payoff multiplied by the probability of its state of nature.

Expected value of perfect information

The maximum amount worth paying for perfect information; it equals the expected payoff with perfect information minus the best expected monetary value without it.

Maximin criterion

A pessimistic decision rule that selects the alternative whose worst possible payoff is the highest among all alternatives.

Shadow price

The change in the optimal objective value from a one-unit increase in a constraint's right-hand side, valid within the constraint's allowable range.

Binding constraint

A constraint satisfied with equality at the optimal solution, so it restricts the feasible region. A non-binding constraint has positive slack or surplus.

Standard error of the mean

The standard deviation of the sample mean, equal to σ/√n, or s/√n when the population standard deviation is unknown and the sample is large.