Last updated 1996 Nov 13

Midterm Key

- A. (10 Points) The environment includes purpose of the forecast, what is to be forecast, management style, frequency, level of aggregation, resources available.
- B. (9 points) For example, naive forecast (easy but simple minded), linear regression (straight line fitting is conceptually appealing but will miss turning points), naive seasonal (quick way to incorporate a repeating pattern but not much more).
- C. (6 points) estimate = 5732 + (5438 - 5635) = 5535. Remember there are 12 months in a year.
- A. (14 points) Give tables to link random decimals to outcomes. Say how you get your random decimals. Set up a table to show each minute of the simulation and what the line looks like.
- B. (4 points) L = sum of simulation linelengths / 10. Get W directly from your simulated results.
- C. (4 poins) L = 1.2/(1.5 - 1.2) = 4; W = 1/(1.5 - 12.) = 3.33
- D. (3 points) The simulation is an observation of one possible ramdon sequence of events. It may or may not be close to a theoretical computation of "average" results.
- A. (10 points) Remember that costs are negative payoffs.
- B. ( 9 points) Stock 1200 for Maximax. Stock 2000 for Maximin. Stock 1200 for Minimax Regret.
- C. (6 points) Stock 1500 for the least expected cost of $47,000. The value of perfect information is $47,000 - $44,700 = $2,300.
- A. (10 points) Pay $20,000 * N65 / D65 = $187,611, using MIA '83.
- B. (5 points)Higher interest would allow the fund to earn more rapidly, so the fund would not need to be as large.
- C. (10 points) The experience of any one individual is uncertain. The overall experience of a group becomes more predictable as the size of the group grows. That makes claims on an insurance company easier is estimate. Funds may be invested with greater certainty and more efficiency. The business of insuring against any calamity, including health problems, becomes more attractive. Small companies band together to make themselves a more attractive risk.

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