Abm Module A

JAIIB_CAIIB_2024_NOTES_MCQs
CAIIB Paper 1 (ABM) Module A: STATISTICS

Index
No. of Unit Unit Name
Unit 1 Definition of Statistics, Importance & Limitations & Data
Collection, Classification & Tabulation
Unit 2 Sampling Techniques
Unit 3 Measures of Central Tendency & Dispersion, Skewness,
Kurtosis
Unit 4 Correlation and Regression
Unit 5 Time Series
Unit 6 Theory of Probability
Unit 7 Estimation
Unit 8 Linear Programming
Unit 9 Simulation
CAIIB Paper 1 (ABM) Module A Unit 1: Definition of Statistics,

Importance & Limitations & Data Collection, Classification &
Tabulation
Introduction
The word ‘Statistics’ has been derived from the

❑ Latin word ‘statisticum’,
❑ Italian word ‘statistia’
❑ German word ‘statistik’,
▪ Each of which means a group of numbers or figures that represent some information of human
interest.
▪ First used by professor Achen well in 1749 to refer to the subject-matter as a whole.
▪ Achen well defined statistics as the Political Science of many countries.
▪ In the early years statistics is to be used only by the kings to collect facts about the state, revenue
of the state or the people in the state of administrative or political purpose.
▪ Gradually the use of statistics which means data or information has increased and widened.
▪ It is now used in almost in all the fields of human knowledge and skills like Business, Commerce,
Economics, Social Sciences, Politics, Planning, Medicine and other sciences, physical as well as
natural.
▪ In many practical situations in life, we come across different types of data which are needed to be
understood, analysed, compared and interpreted correctly.
▪ For example, in a college we need to analyse the data of marks obtained, in a hospital we need to
analyse the data of number of patients having different diseases, rate of mortality, Different types
of data need to be analysed in Economics, Government and Private organisations, Sports and in
many other fields.
Statistical analysis of data can be comprised of four distinct phases:
• Collection of data: In this first stage of investigation, numerical data is collected from different
published or unpublished sources, primary or secondary.
• Classification and Tabulation of data: The raw data collected is to be represented properly for
further calculations. The raw data is divided into different groups or classes and represented in a
form of a table.
• Analysis of data: Classified and Tabulated data is analysed using different formulas and methods
according to purpose of the study or investigation.
• Interpretation of data: At the final stage, relevant conclusions are drawn after the data is
thoroughly analysed
Importance Of Statistics
Statistics is the subject that teaches how to deal with data, so statistical knowledge helps to use proper
methods for collection of data, properly represent the data, use appropriate formula and methods to
analyse correctly and effectively get the results and interpret the data. Applications of Statistics is
important in every sphere of field – Business and economics, Medical, Sports, Weather forecast, Stock
Market, Quality Testing, Government decisions and policies, Banks, Different educational and research
organisations, etc.
Business and Economics
• In Business, the decision maker takes suitable policies and strategies based on information on
production, sale, profit, purchase, finance, etc.
• By using the techniques of time series analysis, the businessman can predict the effect of a large
number of variables with a fair degree of accuracy.
• By using ‘Bayesian Decision Theory’, the businessmen can select the optimal decisions to directly
evaluate the payoff for each alternative course of action.
• In Economics, Statistics is used to analyse demand, cost, price, quantity, different laws of demand
like elasticity of demand and consumer’s maximum satisfaction which is determined on the basis
of data pertaining to income and expenditure.
Medical
• Statistics have extensive application in clinical research and medical field. Clinical research
involves investigating proposed medical treatments, assessing the relative benefits of competing
therapies, and establishing optimal treatment combinations.
Weather Forecast
• Statistical methods, like Regression techniques and Time series analysis, are used in weather
forecasting.
Stock Market
• Statistical methods, like Correlation and Regression techniques, Time series analysis are used in
forecasting stock prices. Return and Risk Analysis is used in calculation of Market and Personal
Portfolios and Mutual Funds.
Bank
• In banking industry, credit policies are decided based on statistical analysis of profitability,
demand deposits, time deposits, credit ratio, number of customers and many other ratios. The
credit policies are based on the application of probability theory.
Sports
• Players use statistics to identify or rectify their mistakes. A proper understanding of the statistics
determines the success of a team or a single athlete.
Function Of Statistics
• Statistics present the facts in definite form.

• Statistics simplify complex data.
• It provides a techniques of comparison.
• Statistics study the relationship between two or more variables.
• It helps in formulating policies.
• It helps in forecasting outcomes.
Limitations Or Demerits Of Statistics
• Statistics do not deal with Individuals: Statistical methods can’t be applied for individual
values of the observations as for individual observation, there is no point of comparing anything
or analysing anything. Statistics is the study of mass data or a group of observations and deals
with aggregates of facts.
• Statistics does not study Qualitative Data: Statistical methods can’t be applied for qualitative or
non-numerical data. Statistics is the study of only of those facts which are capable of being stated
in number or quantity.
• Statistics give Result only on an Average: Statistical methods are not exact. Generally, when we
have large number of observations, it becomes difficult to handle it. A part of the data (sample) is
collected for study and draw conclusion from, as a representative for the whole. As a result, the
result obtained are not exactly same, had we analysed the whole data. The results are true only on
an average in the long run.
• The results can be biased: The data collection may sometime be biased which will make the
whole investigation useless. Generally, this situation arises when data is handled by
inexperienced or dishonest person.
Definitions
Population
It is the entire collection of observations (person, animal, plant or things which is actually studied by a
researcher) from which we may collect data. It is the entire group we are interested in and from which
we need to draw conclusions.
Example: If we are studying the weight of adult men in India, the population is the set of weights of all
men in India.
Data can be classified into two types, based on their characteristics.
• Variates: A characteristic that varies from one individual to another and can be expressed in
numerical terms is called variate. Example: Prices of a given commodity, wages of workers,
heights and weights of students in a class, marks of students, etc.
• Attributes: A characteristic that varies from one individual to another but can’t be expressed in
numerical terms is called an attribute. Example: Colour of the ball (black, blue, green, etc.),
religion of human, etc.
Collection Of Data
Collection of
Data
Primary Data Secondary Data
Direct Interview
Method
Questionnaires
Census and
Sample Survey
Researchers or investigators need to collect data from respondents. There are two types of data.
Primary Data
Primary data is the data which is collected directly or first time by the investigator or researcher from
the respondents. Primary data is collected by using the following methods:
• Direct Interview Method: A face to face contact is made with the informants or respondents
(persons from whom the information is to be obtained) under this method of collecting data. The
interviewer asks them questions pertaining to the survey and collects the desired information.
• Questionnaires: Questionnaires are survey instruments containing short closed-ended questions
(multiple choice) or broad open-ended questions. Questionnaires are used to collect data from a
large group of subjects on a specific topic. Currently, many questionnaires are developed and
administered online.
Census and sample survey
• In a census, data about all individual units (e.g., people or households) are collected in the
population. In a survey, data are only collected for a sub-part of the population; this part is
called a sample.
• These data are then used to estimate the characteristics of the whole population. In this case,
it has to be ensured that the sample is representative of the population in question. For
example, the proportion of people below the age of 18 or the proportion of women and men in
the selected sample of households has to reflect the reality in the total population.
Secondary Data
• Secondary data are the Second hand information. The data which have already been collected and
processed by some agency or persons and is collected for the second time are termed as
secondary data.
• According to M. M. Blair, “Secondary data are those already in existence and which have been
collected for some other purpose.” Secondary data may be collected from existing records,
different published or unpublished sources, like WHO, UNESCO, LIC, etc., various research and
educational organisations, banks and financial places, magazines, internet, etc.
Distinction between primary and secondary data
• The data collected for the first time is called Primary data and data collected through some
published or unpublished sources is called Secondary data.
• The primary data in the hands of one person can become secondary for all others. For example,
the population census report is primary for the Registrar General of India and the information
from the report is secondary for others.
• Primary data are original as they are collected first time from the respondents directly or by
preparing questionnaires. So they are more accurate than the secondary data. But the collection
of primary data requires more money, time and energy than the secondary data. A proper choice
between the two forms of information should be made in an enquiry.
Classification and Tabulation
So, we learned about the different methods of collecting primary and secondary data. The raw data,
collected in real situations are arranged randomly, haphazardly and sometimes the data size is very
large. Thus, the raw data do not give any clear picture and interpreting and drawing any conclusion
becomes very difficult. To make the data understandable, comparable and to locate similarities, the next
step is classification of data. The method of arranging data into homogeneous group or classes according
to some common characteristics present in the data is called Classification.
Example: The process of sorting letters in a post office, the letters are classified according to the cities
and further arranged according to the streets. Classification condenses the data by removing
unimportant details. It enables us to accommodate large number of observations into few classes and
study the relationship between several characteristics. Classified data is presented in a more organised
way so it is easier to interpret and compare them, which is known as Tabulation.
There are four important bases of classifications:
• Qualitative Base: Here the data is classified according to some quality or attribute such as sex,
religion, literacy, intelligence, etc.
• Quantitative Base: Here the data is classified according to some quantitative characteristic like
height, weight, age, income, marks, etc.
• Geographical Base: Here the data is classified by geographical regions or location, like states,
cities, countries, etc. like population in different states of India.
• Chronological or Temporal Base: Here the data is classified or arranged by their time of
occurrence, such as years, months, weeks, days, etc. This classification is also called Time Series
data.
Example: Sales of a company for different years.
Types of Classification
• If we classify observed data for a single characteristic, it is known as One-way Classification.

Ex: Population can be classified by Religion – Hindu, Muslim, Christians, etc.
• If we consider two characteristics at a time to classify the observed data, it is known as a Two-
way classification. Ex: Population can be classified according to Religion and sex.
• If we consider more than two characteristics at a time in order to classify the observed data, it
is known as Multi-way Classification. Ex: Population can be classified by Religion, sex and
literacy.
Frequency Distribution
Frequency
▪ If the value of a variable (discrete or continuous) e.g., height, weight, income, etc. occurs twice or
more in a given series of observations, then the number of occurrences of the value is termed as
the “frequency” of that value.
▪ The way of representing a data in a form of a table consisting of the values of the variable with the
corresponding frequencies is called “frequency distribution”.
▪ So, in other words, Frequency distribution is a table used to organise the data.
▪ The left column (called classes or groups) includes numerical intervals on a variable under study.
▪ The right column contains the list of frequencies, or number of occurrences of each class/group.
▪ Croxton and Cowden defined frequency distribution as a statistical table which shows the sets of
all distinct values of the variable arranged in order of magnitude, either individually or in groups
with their corresponding frequencies side by side Intervals are normally of equal size covering
the sample observations range.
Class-limits or Class Intervals
• A class is formed within the two values, class-limits or class-intervals. The lower value is called
lower class limit or lower-class interval and the upper value is called upper class limit or class
interval.
Class Length or Class Width
• The difference between the class’upper and lower class limit is called the length or the width of
class.
Class Length = Class Width = Upper Class Interval – Lower Class Interval
Mid-Value or Class Mark
• The mid-point of the class is called mid-value or class mark.
Class Mark = (Lower class-limit + Upper Class limit)/2
Types of Class Intervals
• Exclusive type,
• Inclusive type
Exclusive type Class intervals like
• 0–10, 10–20; 500–1000, 1000–1500 are called exclusive types.
• Here the upper limits of the classes are excluded from the respective classes and put in the next
class while considering the frequency of the respective class.
• For example, the value 15 is excluded from the class 10–15 and put in the class 15–20.
Inclusive type Class intervals
• 60–69, 70–79, 80–89, etc. are inclusive type.
• Here both the lower and upper class limits are included in the class-intervals while considering
the frequency of the respective class,
• e.g., 60 and 69 are both included in the class 60–69.
Inclusive Type Class Interval
Exclusive Type Class Interval
Class Boundaries
Inclusive classes can be converted to exclusive classes and the new class intervals are called class
boundaries.
Example : The classes 5–9, 10–14 can be converted to exclusive type of classes using the formula → New
UCI = Old UCI + (10 – 9)/2 = 9 + 0.5 = 9.5. New LCI = Old LCI – (10 – 9)/2 = 5 – 0.5 = 4.5. So the class-
boundaries are 4.5–9.5, 9.5–14.5, etc.
Open-end Class Interval
In open-end class interval either the lower limit of the first class or upper limit of the last class or both
are missing.
Example:
Below 10
10–20
20–30
30–40
Above 40
Relative Frequency = frequency /Total frequency
Example: Relative frequency of the class interval = 20–30 in Example 2 is 12/32 = 0.375
Percentage Frequency
Percentage Frequency = (Class frequency/Total Frequency) × 100
Example: Percentage frequency of the class interval = 20–30 in Example 2 is (12/32) 100 = 37.5.
Frequency Density
Frequency density of a class interval = Class frequency/Width of Class
Continuous Frequency Distribution:
▪ Variable takes values which are expressed in class intervals within certain limits.
Problem: Marks obtained by 20 students in an exam for 50 marks are given below–convert the data into
continuous frequency distribution form.
18, 23, 28, 29, 44, 28, 48, 33, 32, 43, 24, 29, 32, 39, 49, 42, 27, 33, 28, 29.
Problem: Following data reveals information about the number of children per family for 25 families.
Prepare frequency distribution of number of children
(say variable x, taking distinct values 0, 1, 2, 3, 4).
32112
40123
12042
21232
13401
Solution:
CAIIB Paper 1 (ABM) Module A Unit 2: Sampling Methods

Sampling
Sampling is a process used in statistical analysis in which a predetermined number of observations

are taken from a larger population. The methodology used to sample from a larger population depends
on the type of analysis being performed.
Types of sampling
There are two methods of selecting from populations

• Non- random or judgement sampling
• Random or probability sampling
Random Sampling
A probability sampling method is any method of sampling that utilizes some form of random
selection. In order to have a random selection method, you must set up some process or procedure that
assures that the different units in your population have equal probabilities of being chosen.
Type of Random Sampling
There are four main type of random sampling
i)Simple Random Sampling (SRS)
ii)Stratified Sampling
iii) Cluster Sampling

iv) Systematic Sampling
• Simple Random Sampling (SRS): Simple Random Sampling selects samples by methods
that allow each possible sample to have an equal probability of being picked and each item in
the entire population to have an equal chance or being included in the sample.
• Systematic Sampling: In systematic sampling, elements are selected from the population at a
uniform level that is measured in time, order, or space. If we wanted to interview every
twentieth student on a college campus, we would choose a random starting point in the first
twenty names in the student directory and then pick every twentieth name thereafter.
• Stratified Sampling: To use stratified sampling, we divide the population into relatively
homogenous groups, called strata. Then we use one of two approaches. Either we select at
random from each stratum a specified number of elements corresponding to the proportion of
that stratum in the population as a whole or we draw an equal number of elements from each
stratum and give weight to the results according to the stratum’s proportion of total population.
• Cluster Sampling: In cluster sampling, we divide the population into groups or clusters and then
select a random sample of these clusters. We assume that these individual clusters are
representative of the population as a whole. If a market Research team is attempting to determine
by sampling the average number of television sets per household in a large city, they could use a
city map and divide the territory into blocks and then choose a certain number of blocks
(clusters) for interviewing. Every household in each of these blocks would be interviewed. A well
designed cluster sampling procedure can produce a more precise sample at considerably less cost
than that of simple random sampling.
Sampling distribution
Sampling Distribution is the distribution of all possible values of a statistic from all possible samples of a
particular size drawn from the population.
Each sample we draw from a population would have its own means or measure of central tendency and
standard deviation. Thus, the statistics we compute for each sample, would vary & be different for each
random sample taken.
Sample Distribution Table

Mean=162.40
SAMPLES, their DATA & Mean
CONCEPT of STANDARD ERROR
• Standard deviation of the distribution of the sample means is called the standard error of the
mean.
• Similarly standard error of the proportion is the standard deviation of the distribution of the
sample proportions.
• e.g. We take the average height of college girls in India across various samples. We would
calculate mean height of each sample. Obviously there is some variability in observed mean. This
variability in sampling statistics results from the sampling error due to chance.
• Thus the standard deviation of the sampling distribution of means measures the extent to which
the means vary because of a chance error in the sampling process. Thus the standard deviation of
distribution of a sample statistic is known as the Standard error of the statistic.
• Thus, a standard error indicates not only the size of the chance error but also the accuracy we are
likely to get if we use the sample statistic to estimate a population statistic.
Sampling From Normal Population

Finite Populations:
μ= 162.40
x̄ = 162.40
This is not coincidence. The mean of the sample means is the same as the population mean, whenever
we use simple random sampling.
Example -Bank calculate that its individual saving account have a mean of Rs.2000 and SD of 600. bank
takes a sample of 100 account. Calculate the Standard error?
What is the probability that the sample lie between 1900 & 2050.
σX¯=σ/ √n
= 600 /10
=60
Probability associated with a standard normal variable
Standard Error Of The Mean For Infinite Populations:
Example: Bank calculate that its individual saving account have a mean of Rs.5000 and SD of 600. bank
takes a sample of 100 account. Calculate the Standard error?
What is the probability that the sample lie between 1900 & 2050.
STEP 1 : Standard deviation of error
σX¯=σ/ √n
= 600 /10
=60
Central Limit Theorem
▪ The mean of the sampling distribution of the mean will equal the population mean regardless of
the sample size, even if the population is not normal.
▪ As the sample size increases, the sampling distribution of the mean will approach normality,
regardless of the shape of the population distribution.
▪ This relationship between the shape of the population distribution & the shape of sampling
distribution of the mean is called the Central Limit Theorem.
➢ Actually a sample doesnot have to be very large for the sampling distribution of the mean to
approach normal
➢ Statistician use the normal distribution as an approximation to the sampling distribution
whenever the sample size is atleast 30, but the sampling distribution whenever the sample size is
atleast 30.
➢ The significance of the CLT is that it permits us to use sample statistics to make interference
about population parameters without knowing anything about the shape of the frequency
distribution of that population.
Example:
Bank distribution has a mean of Rs.19000 & standard deviation of Rs.2000. If we draw a random sample
of 30 tellers, What is the probability that their earning will average more than Rs.19750 annually?
STEP 1 : Calculate Standard error
= 2000/ √30
= 2000/ 5.477
= 365.16
STEP 2 : Z value & Standard Normal Probability Distribution
X = 19750
= 19750-19000/365.16
= 750/ 365.16
=2.05
Finite Population Multiplier
Standard Error Of The Mean For Finite Populations
N = size of population
N = size of the sample
Example:
We are interested in a population of 20 textile companies of the same size, all of which are experiencing
excessive labour turnover. Standard deviation of the distribution of annual turnover is 75 employees. If
we sample 5 of these textile companies, without replacement then compute the standard error of mean?
= 75/ √5 [√(20-5/20-1)]
= 33.54 * 0.888
= 29.8
Numerical on Sampling
Q1. A sack contains 3 pink balls and 7 green balls. What is probability to draw one pink ball and two
green balls in one draw?
23
(a)
40
21
(b)
40
27
(c)
40
9
(d)
20
21
(e)
38
Ans(b)
Out of (3+ 7) = 10 balls, three (one pink & two green) balls are expected to be drawn
3c ×7c
1 2
So, required probability =
10c
3
3 7
×
1 2 ×1
= 10
3×2×1
3×21
=
120
21
=
40
Q2.A sack contains 4 black balls 5 red balls. What is probability to draw 1 black ball and 2 red balls in
one draw?
(a) 11/19
(b) 10/21
(c)12/22
(d) 19/11
Ans: B
Solution :
Out of 9, 3 (1 black & 2 red) are expected to be drawn)
Hence sample space
n(S) = 9c3
= 9!/(6!×3!)
= 362880/4320
= 84
Now out of 4 black ball 1 is expected to be drawn hence
n(B) = 4c1
=4
Same way out of 5 red balls 2 are expected be drawn hence
n(R) = 5c2
= 5!/(3!×2!)
= 120/12
= 10
Then P(B U R) = n(B)×n(R)/n(S)
i.e 4×10/84 = 10/21
CAIIB Paper 1 (ABM) Module A Unit 3: Measures of Central Tendency

& Dispersion, Skewness, Kurtosis
Introduction To Measures Of Central Tendency
▪ Statistical data is first collected (primary or secondary) and then classified into different groups
according to common characteristics and presented in a form of a table.
▪ It is easy for us to study the different characteristics of data from a tabular form.
▪ Further, graphs and diagrams can also be drawn to convey a better impression to the mind about
the data.
▪ Classified and Tabulated data need to be analysed using different statistical methods and tools
and then draw conclusions from it.
▪ Central Tendency and Dispersion are the most common and widely used statistical tool which
handles large quantity of data and reduces the data to a single value used for doing comparative
studies and draw conclusion with accuracy and clarity.
▪ According to the statistician, Professor Bowley “Measures of Central Tendency (averages) are
statistical constants which enable us to comprehend in single effort the significant of the whole”.
The main objectives of Measure of Central Tendency are:
✓ To condense data in a single value.
✓ To facilitate comparisons between data.
▪ In other words, the tendency of data to cluster around a central or mid value is called central
tendency of data, central tendency is measured by averages.
▪ There are different types of averages, each has its own advantages and disadvantages.
Requisites of a Good Measure of Central Tendency
✓ It should be rigidly defined.
✓ It should be simple to understand and easy to calculate.
✓ It should be based on all the observations of the data.
✓ It should be capable of further mathematical treatment.
✓ It should be least affected by the fluctuations of the sampling.
✓ It should not be unduly affected by the extreme values.
✓ It should be easy to interpret.
Three types of averages are Mean, Median and Mode.
Mean
▪ Mean or average is the most commonly used single descriptive measure of Central Tendency.
▪ Mean is simple to compute, easy to understand and interpret.
Mean is of three types:
✓ Arithmetic Mean,
✓ Geometric Mean
✓ Harmonic Mean.
Arithmetic Mean
▪ The arithmetic mean is the simplest and most widely used measure of a mean, or average.
▪ It simply involves taking the sum of a group of numbers, then dividing that sum by the count of
the numbers used in the series.
Arithmetic Mean of Ungrouped or Raw Data
Example 1: Consider the marks scored by 10 students in Mathematics in a certain examination

35, 30, 18, 15, 40, 30, 52, x, 47, 10. I the arithmetic mean is 30, find the value of x.
X̄ = 35 +30 +18 + 15 + 40 +30 +52 + x + 47 + 10/ 10
30 = 277 + x/ 10
300 = 277 + x
X= 23
Arithmetic Mean of Grouped data
▪ If a variate X take values x1, x2, …, xn with corresponding frequencies f 1, f 2, …, f n respectively,
then the arithmetic mean of these values is
Example 2: Find the Arithmetic mean for following:

Combined Arithmetic Mean
If X̄ 1 and X̄ 2are the arithmetic mean of two samples of size n1 and n2 respectively then, the
Combined arithmetic mean
Example: The average marks of a group of 100 students in Mathematics are 60 and for other
group of 50 students, the average marks are 90. Find the average marks combined group of 150
students.
Example: In private health club, there are 200 members, 100 men, 80 women and 20 children.
The average weight of men, women and children are 60 kgs, 50 kgs and 35 kgs respectively. Find
the average weight of the combined group.
n1 = 100, n2 = 80, n3 = 20 x1 = 60, x2 = 50, x3 = 35
Combined mean =
X̄ = n1 x1 + n2 x2 + n3 x3/ n1 + n2 + n3
= 100*60 + 80*50 + 20*35/ 200
= 6000+ 4000 + 700 / 200
= 10700/2
= 53.5
Merits of Arithmetic Mean
• It is rigidly defined
• It is easy to calculate and simple to follow
• It is based on all the observations
• It is determined for almost every kind of data
• It is finite and indefinite
• It is readily put to algebraic treatment
• It is least affected by fluctuations of sampling.
Demerits of Arithmetic Mean
• It is highly affected by extreme values.

• It cannot average the ratios and percentages properly.
• It is not an appropriate average for highly skewed distribution.
• It cannot be computed accurately if any item is missing.
• The mean sometimes does not coincide with any of the observed value.
• Mean cannot be calculated when open-end class intervals are present in the data
Geometric Mean
The Geometric Mean (GM) is the average value or mean which measures the central tendency of the set
of numbers by taking the root of the product of their values. Geometric mean takes into account the
compounding effect of the data that occurs from period to period. Geometric mean is always less than
Arithmetic Mean and is calculated only for positive values.
Applications
• It is used in stock indexes.

• It is used to calculate the annual return on the portfolio.
• It is used in finance to find the average growth rates which are also referred to the compounded
annual growth rate.
• It is also used in studies like cell division and bacterial growth, etc.
Geometric Mean of Ungrouped or Raw Data
Example: Find the G.M. of the values 10, 24, 15, and 32.
Given 10, 24, 15, 32
We know that G.M. = 4√ 10*24*15*32
= (10*24*15*32)^1/4
= 115200 ^1/4
= 18.423
Geometric Mean of Grouped or Raw Data
Example: Find the G.M. for the following data

Merits of Geometric Mean
• It is useful in the construction of index numbers.

• It is not much affected by the fluctuations of sampling.
• It is based on all the observations.
Demerits of Geometric Mean
• It cannot be easily understood.

• It is relatively difficult to compute as it requires some special knowledge of logarithms.
• It cannot be calculated when any item or value is zero or negative.
Harmonic Mean
• Harmonic Mean is defined as the reciprocal of the arithmetic mean of reciprocals of the
observations. Arithmetic mean is appropriate measure of central tendency when the values have
the same units whereas the Harmonic mean is appropriate measure of central tendency when the
values are the ratios of two variables and have different measures. So, generally Harmonic mean
is used to calculate the average of ratios or rates.
Applications
• It is used in finance to find average of different rates.

• It can be used to calculate quantities such as speed. This is because speed is expressed as a ratio
of two measuring units such as km/hr.
Harmonic Mean of Ungrouped or Raw data:
H.M = n / (1/x1 + 1/x2 + 1/x3+ ….. 1/y)

Example: Find the HM of the values 10, 24, 15, and 32
= 4/ (1/10+1/24+1/15+1/32)
= 4 / 0.1 + 0.042 + 0.067 + 0.031
= 4/.24
= 16.667
Harmonic Mean of Ungrouped or Raw data:
N /( F1/X1 + F2/X2 + F3/X3….)

Example: Find the H.M. for the following data
Comparison between Arithmetic, Geometric and Harmonic Mean

▪ The arithmetic mean is appropriate if the values have the same units, whereas the geometric
mean is appropriate if the values have different units and harmonic mean is appropriate if the
data values are ratios of two variables with different measures, called rates.
▪ Arithmetic Mean > Harmonic Mean > Geometric Mean
▪ A.M. × H.M. = (G.M.)^2

Example: Find the Harmonic mean of two numbers a and b, if their Arithmetic mean is 16 and
Geometric mean is 8.
▪ A.M. = 16 and G.M. = 8
▪ A.M. × H.M. = G.M^2
▪ 16 × H.M. = 8^2
▪ 16 × H.M. = 64
▪ H.M.= 64/16 = 4
Median And Quartiles
▪ The median is the middle value of a distribution, i.e., median of a distribution is the value of the
variable which divides it into two equal parts.
▪ It is the value of the variable such that the number of observations above it is equal to the number
of observations below it.
▪ Observations are arranged either in ascending order or descending order of their magnitude.
▪ Median is a position average whereas the arithmetic mean is a calculated average.
Median of Ungrouped or Raw data
▪ The formula to calculate the median of the data is different for odd and even number of
observations.
Median of odd Number of Observations
If the total number of given observations is odd, then the formula to calculate the median for a number of
n observations is:
Median = n +1/ 2 th observation
Median of even Number of Observations
If the total number of given observations is even, then the median formula to calculate the median for n
number of observations is:
Median = Median= (n/2)th observation + (n/2+1)th observation / 2
Example: Find Median of 34, 32, 48, 38, 24, 30, 27, 21, 35.
Arranging the data in ascending order,
21, 24, 27, 30, 32, 34, 35, 38, 48.
n = 9;
Median= (n+1/2) th position
= (9+1/2) the position
= 32
Median of Grouped data:
If variable X takes values X1, X2, X3, X4…..X5 and corresponding frequencies f1, f2, f3, f4,….. Fn
respectively, then the median value is given by
Median class is the class in which the corresponding value of less than cumulative frequency just
exceeds the value of N/2.
▪ l1 = lower limit of the median class,
▪ l2 = upper limit of the median class
▪ f = frequency of the median class,
▪ cf = cumulative frequency of the class preceding the median class,
▪ N = total frequency.
Example: Find Median for the following data.
Quartiles
▪ A quartile represents the division of data into four equal parts.

▪ First, second intervals are based on the data values and third their relationship to the total set of
observations.
▪ By dividing the distribution into four groups, the quartile calculates the range of values above and
below the mean.
A quartile divides data into three points
✓ the lower quartile Q1,
✓ the median Q2, and
✓ the upper quartile Q3, to create four dataset groupings.
The interquartile range is a measure of variability around the median, which is calculated using the
quartiles are denoted by Q1, Q2 and Q3
Calculate Q1,Q2 & Q3

Q1 = l1 + (q1-CF)/f (l2-l1) where q1 = N/4
Q2 = l1 + (q2- CF)/f (l2-l1) where q2 = 2N/4
Q3 = l1 + (q3- CF)/f (l2-l1) where q3 = 3N/4
Example: Find the quartiles for the following data
Q3 = l1 + (q3- CF)/f (l2-l1)

= 30 (150-126) / 25 (35-30)
= 34.8
MODE
▪ The mode of a set of numbers is that number, which occurs more number of times than any other
number in the set.
▪ It is the most frequently occurring value.
▪ If two or more values occur with equal or nearly equal number of times, then the distribution is
said to have two or more modes.
▪ In case, there are three or more modes and the distribution or data set is said to be multimodal.
Mode of Ungrouped or Raw data
Example 22: Find Mode for the data: 23, 25, 20, 23, 26, 21, 27, 28, 30, 27, 23.
Value 23 occurs maximum number of times,
so Mode = 23.
Mode of Grouped data
If a variate X take values x1, x2, x3, x4 with corresponding frequencies f1, f2, f3, f4…. respectively, then
the mode is
Where,
l1 = lower limit of the modal class
l2= per limit of the modal class
f1 = frequency of the modal class
f0 = frequency of the class preceding the modal class
f2 = frequency of the class succeeding the modal class
Example: Find Mode for data
Merits of Mode
• It is easy to calculate and understand.

• It is not affected much by sampling fluctuations.
• It is not necessary to know all items. Only the point of maximum concentration is required.
Demerits of Mode
• It is ill defined as it is not based on all observations.

• It is not capable of further algebraic treatment.
• It is not a good representative.
Relationship among Mean, Media and Mode
• Mode = 3 Median – 2 Mean
Introduction to Measures Of Dispersion
• A single value that attempts to describe a set of data by identifying the central position within the
set of data is called measure of central tendency.
• Measure of Dispersion is another property of a data which establishes the degree of variability or
the spread out or scatter of the individual items and their deviation from (or the difference with)
the averages or central tendencies.
• The process by which data are scattered, stretched, or spread out among a variety of categories is
referred to as dispersion.
• Finding the size of the distribution values that are expected from the collection of data for the
particular variable is a part of this process.
• The dispersion of data is a concept in statistics that lets one understand a dataset more simply by
classifying individual pieces of data according their own unique dispersion criteria, such as the
variance, the standard deviation, and the range.
• A collection of measurements known as dispersion can be used to determine the quality of the
data in an objective and quantitative manner.
Various measures of dispersion are given below:
Four Absolute Measures of Dispersion
• Range
• Quartile Deviation
• Mean Deviation
• Standard Deviation
Four Relative Measures of Dispersion
• Coefficient of Range
• Coefficient of Quartile Deviation
• Coefficient of Mean Deviation
• Coefficient of Variation
Characteristics of a Good Measure of Dispersion
• It should be rigidly defined.
• It should be based on all observations.
• It should be easy to calculate and understand.
• It should be capable of further algebraic treatment.
• It should not be affected much by sampling fluctuations.
Range and Coefficient Of Range
Range
It is the simplest absolute measure of dispersion.

Range (R) = Maximum – Minimum
Coefficient of Range = (Max – Min)/(Max + Min)
Example 1 Find the range and coefficient of range of the following items: 18, 15, 20, 17, 22, 16.
▪ Range = Max – Min = 22 – 15 = 7.
▪ Coefficient of Range = (Max – Min)/(Max + Min) = 7/37 = 0.19
Note: Range and Coefficient of Range are used to measure the spread in Quality Control, Fluctuations in
the Share Prices, in Weather Forecasts:
Merits of Range
• It is easy to understand.
• It is easy to calculate.
Demerits of Range
• It is not based on all observations.
• It does not have sampling stability. A single observation may change the value of range.
• As the amount of data increases, range becomes less satisfactory
Quartile Deviation And Coefficient Of Quartile Deviation
It is the mid-point of the range between two quartiles. Quartile Deviation is defined as QD = (Q3 – Q1
)/2
Where Q1 = 1st quartile and Q 3 = 3rd quartile.
Co-efficient of QD = (Q3 – Q1)/ (Q3 + Q1)
Merits of Quartile Deviation
• It is easy to calculate and understand.
• It is not affected by extreme values.
Demerits of Quartile Deviation
• It is not based on all observations.
• It is not capable of further algebraic treatment.
• It is affected by sampling fluctuations.
Mean Deviation and Coefficient of Mean Deviation
▪ Mean deviation of a set of observations of a series is the arithmetic mean of all the deviations.
▪ It is the deviations from mean when calculated considering their absolute values and are
averaged.
Mean Deviation (MD) ungrouped data
MD = [(X1- X̄ ) + (X2- X̄ ) + (X3- X̄ ) + ____+ (Xn - X̄ )] / n

Example: Find Mean Deviation and Coefficient of Mean Deviation
Merits of Mean Deviation
• It is based on all observations.

• It is easy to understand and also easy to calculate.
• It is not affected by extreme values.
Demerits of Mean Deviation
• Mean deviation ignores algebraic signs; hence it is not capable of further algebraic treatment.
• It is not very accurate measure of dispersion.
Note: Mean deviation and its coefficient are used in studying economic problems such as distribution of
income and wealth in a society.
Standard Deviation And Coefficient Of Variation
▪ Standard deviation is the most important and commonly used measure of dispersion.
▪ It measures the spread or variability of a distribution.
▪ A small standard deviation means a high degree of consistency in the observations as well as
homogeneity of the series.
Standard Deviation ungrouped Data
Standard Deviation (SD) grouped data

Example: Find Standard Deviation and Coefficient of Variation for the following data: 2, 3, 7, 8,
10.
Example: Find Standard Deviation?

Merits of Standard Deviation

• It is rigidly defined and has a definite value.
• It is based on all observations.
• It is not affected much by sampling fluctuations.
Demerits of Standard Deviation
• It is not easy to calculate.
• It is not easy to understand.
• It gives more weight to extreme items.
Skewness And Kurtosis
• Skewness is the degree of distortion from the symmetrical bell curve or the normal distribution.
• It measures the lack of symmetry in data distribution.
• There are two types of skewness– positive and negative.
• If bulk of observations is in the left side of mean and the positive side is longer, it is called positive
skewness of the distribution.
• mean and median > mode.
• If bulk of observations is in the right side of mean and the negative side is longer, it is called
negative skewness of the distribution.
• mean and median < mode.
Karl Pearson’s measure of skewness is
µ1 = First central moment = ∑f(x−x̅ )^ 1/ n

µ2 = Second central moment = ∑f(x−x̅ )^ 2/ n
µ3 = third central moment = ∑f(x−x̅ )^ 3/ n
µ4 = Forth central moment = ∑f(x−x̅ )^ 4/ n
• Kurtosisis all about the tails of the distribution – peakedness or flatness.
• It is used to describe the extreme values in one versus the other tail.
• It is actually the measure of outliers present in the distribution.
• The distributions whose peaks are same as of Normal distribution’s peak, are called Mesokurtic.
• The distributions whose peaks are higher and sharper than mesokurtic, which meanstails are
fatter, are called Leptokurtic distributions.
• The distributions whose peaks are lower and shorter than mesokurtic, which means tails are
thinner, are called Platykurtic distributions.
• Measure of Kurtosis = β2 = µ4/µ2^2
• µ4 = fourth central moment = ∑f(x−x̅ ) 4/ n
• µ2 = second central moment = ∑f(x−x̅ ) 2/ n
• β2 = 0 (Mesokurtic distribution),
• β2 > 0 (Leptokurtic distribution),
• β2 < 0 (Platykurtic distribution).
CAIIB Paper 1 (ABM) Module A Unit 4: Correlation and Regression

Introduction
Correlation Analysis
• Correlation analysis is applied in quantifying the association between two continuous

variables, for example, an dependent and independent variable or among two independent
variables.
Regression Analysis
• Regression analysis refers to assessing the relationship between the outcome variable and
one or more variables. The outcome variable is known as the dependent or response variable
and the risk elements, and cofounders are known as predictors or independent variables.
• The dependent variable is shown by “y” and independent variables are shown by “x” in
regression analysis.
Linear Regression
• Linear regression is a linear approach to modelling the relationship between the scalar
components and one or more independent variables. If the regression has one independent
variable, then it is known as a simple linear regression. If it has more than one independent
variables, then it is known as multiple linear regression.
• Linear regression only focuses on the conditional probability distribution of the given values
rather than the joint probability distribution. In general, all the real world regressions models
involve multiple predictors. So, the term linear regression often describes multivariate linear
regression.
Correlation and Regression Differences

There are some differences between Correlation and regression.
• Correlation shows the quantity of the degree to which two variables are associated. It does not fix
a line through the data points. You compute a correlation that shows how much one variable
changes when the other remains constant. When r is 0.0, the relationship does not exist. When r
is positive, one variable goes high as the other goes up. When r is negative, one variable goes high
as the other goes down.
• Linear regression finds the best line that predicts y from x, but Correlation does not fit a line.
• Correlation is used when you measure both variables, while linear regression is mostly applied
when x is a variable that is manipulated.
Comparison Between Correlation and Regression
Basis Correlation Regression

Meaning A statistical measure that Describes how an
defines co-relationship or independent variable is
association of two associated with the
variables. dependent variable.
Dependent and No difference Both variables are
Independent variables different.
Usage To describe a linear To fit the best line and

relationship between two estimate one variable
variables. based on another
variable.
Objective To find a value expressing To estimate values of a
the relationship between random variable based on
variables. the values of a fixed
variable.
Correlation and Regression Statistics
The degree of association is measured by “r” after its originator and a measure of linear association.
Other complicated measures are used if a curved line is needed to represent the relationship.
The above graph represents the correlation.

The coefficient of correlation is measured on a scale that varies from +1 to -1 through 0. The complete
correlation among two variables is represented by either +1 or -1. The correlation is positive when
one variable increases and so does the other; while it is negative when one decreases as the other
increases. The absence of correlation is described by 0.
Correlation Coefficient Formula

Simple Linear Regression Equation

As we know, linear regression is used to model the relationship between two variable. Thus, a simple
linear regression equation can be written as:
Y = a + bX
Where,
Y = Dependent variable
X = Independent variable
a = [(∑y)(∑x2) – (∑x)(∑xy)]/ [n(∑x2) – (∑x)2]
b = [n(∑xy) – (∑x)(∑y)]/ [n(∑x2) – (∑x)2]
CAIIB Paper 1 (ABM) Module A Unit 5: Time Series

Time Series
Secular trend is caused by basic inherent factors. Business cycle trends are mostly upward. The quality of
forecast depends on the information provided by past data and its validity. Data or statistical
information accumulated at regular intervals is called TIME SERIES.
There are 4 types of variations in time series
• Secular Trend
• Cyclical Fluctuation
• Seasonal Variation
• Irregular Variation.
Secular Trend
Cyclic Fluctuation
Time Series
Seasonal Variation
Irregular Variation
Secular Trend
In this first type of variation the change comes over a long period of time. A steady increase in
cost of living recorded by Consumer Price Index is a good example. From year to year there is a
fluctuation but there is a steady increase in the trend. Let us see the series given here.
Let us try to detect patterns in the information over regular intervals of time. Then let us try to
predict to cope with uncertainty.
Year 199 199 199 20 200 200 2003

7 8 9 W 1 2
Number 98 105 116 119 135 156 177

Observations
There is an increase over time of 7 years. But the increases are not equal.
Cyclical Fluctuation
• Most common example of a cyclical fluctuation is a business cycle. Over time, there are years
when business cycle hits peak above the trend line. There are also times when business activity
slumps, and hits a point below the trend line.
• Fluctuations in business activity occur many times, and they have irregular periods and vary
widely in amplitude from cycle to cycle. The time between hitting peaks and lows are periods – it
can be one or many. The cyclical moves do not follow any regular pattern, they are irregular.
Seasonal Variation
• There is a pattern of change within a year. A doctor can expect the number of flu cases to
increase in winter. Hill resorts can expect more tourists during summer.
• These are regular patterns and can be used for forecasting the amount of flu vaccines required
during winter, the doctor's income during winter, the hotel bookings in resorts and availability of
air and train bookings.
Irregular Variation
• The value of the variable is unpredictable, changing in a random manner. The effects of
earthquakes, floods, wars, etc., cannot be predicted.
• As a result of flood, the agriculture output suffers. Then the prices go up at an unprecedented
rate. This could not be predicted by using time series.
• Even though we described time series as exhibiting one or another variation, in most instances
real time series will contain several of these components. Then the question is how to measure
them.
Trend Analysis
There are three main reasons, why we should study the trends:
• We will be able to describe historical patterns, which will help us to evaluate the success of
previous policies – long-term direction of the time series is given by secular trend.
• Past trends will help us to project the future – some growth rate of population, GDP.
• We will be able to separate the trend component and eliminate it from the series, to get an
accurate idea of other components like seasonal fluctuations.
Ye = a + bx
The General equation for annual production
Ye = 139.25 + 7.536x
Estimate the no of unit ,it may produce during 2019
‘x’ is coded time
= 2(2019-2012.5) = 13
= 139.25 + 7.536 813
= 237.22
= 237 Ships loaded
Parabolic Equation:
Many series may series can be best described by curves. In these cases, the linear model doesnot
adequately describe the change in the change in variable as time changes. To overcome this, we
use parabolic curves.
2. σ x 2y = a σ x 2 + c σ x 4
565 = 10a + 34c
X=2021-2014=7
=30.3+22.7*7+5.07*49
=446.6
Cyclical variation
Cyclical variation is a component of the time series, which tends to oscillate above and below the
secular trend line for periods longer than a year. Seasonal variation makes a complete regular cycle
within each year and does not affect one year any more than another. Once we identify the secular trend,
we can isolate the remaining cyclical and irregular components of the trend. Let us assume cyclical
component explains most of the variations left unexplained by the trend analysis.
Residual Method
▪ Percentage of Trend = y actual / y trend *100

▪ Relative cycle residual
Multiply X by 2 if n is even
Ye = a +bx
b = ΣXY/ ΣX^2
= 168/ 168 = 1
a = y¯ - b x¯
= 664/8 = 83
Ye= 83 + x
Seasonal Variation
Time series also includes seasonal variation. Seasonal variation is repetitive and predictable. This
can be defined as movements around the trend line in one year or less. In order to measure seasonal
variations, time intervals must be measured in small units, like days, weeks, etc.
Step 5
For modified mean : discard lowest and highest value

Total of Indices = 404.10
STEP 6:
Four quarter indices = 400
= 400/404.1 = 0.9899
Spring = 91.25 * 0.9899 = 90.3
Summer = 107.7 * .9899 = 106.6

Fall = 112.1
Winter = 91
Irregular Variation
The final component is irregular variation. After we have eliminated trend, cyclical and seasonal
variations from the time series, we may still have unpredictable factor left. Irregular variations occur
over very short intervals and follow random patterns. We may not be able to isolate them
mathematically, but we may isolate the causes for the same. For example, an unusually very cold winter
in a region may increase electricity consumption significantly. Wars may increase air and train travel
because of the movement of troops. We may not be able to identify all causes. But over time, these
random variations tend to correct themselves.
STEP 1: First calculate Seasonal Indices

Q1 = 95.1
Q2 = 129.9
Q3 = 61.2
Q4 = 113.9
Deseasonlised
STEP 2: TREND LINE (Ye = a + bx)

a= y
b = xy/x^2
Trend line = a+bx

=18+0.16x
STEP 3 : Trend Value

Percent of Trend
Suppose management wants to determine the sales value for the 3rd qt of 6th year
23- 10.5 = 12.5 (coded X value)
12.5 * 2 = 25
Ye = a +bx
= 18 + 0.16*25
= 22
Means 22000 units
CAIIB Paper 1 (ABM) Module A Unit 6: Theory of Probability

Introduction To Probability
• Probability means chance/s or possibility of happening of an event. For example, suppose we

want to plan for a picnic in a weekend.
• Before planning we may check the weather forecast and see what is the chance that there will be
rain at that time, accordingly we may do the planning.
• Probability gives a numerical measure of this chance or possibility.
• Suppose it says that there is a 60% chance that rain may occur in this weekend, 60% or 0.6 is
called the probability of raining. To understand the concept of probability first we have to
understand the concepts of Factorial, Permutations and Combinations.
Factorial:
• In mathematics, Factorial is equal to the product of all positive integers which are less than or
equal to a given positive integer. The Factorial of an integer is denoted by that integer and an
exclamation point.
▪ Thus, factorial five is written as 5! which is equal to 1 × 2 × 3 × 4 × 5 = 120
▪ The product of the first n natural numbers is called factorial n and is denoted by n! =
n × (n – 1) × (n – 2) × … × 2 × 1
▪ The above formula can also be represented as n! = n × (n – 1) … (n – r + 1) × (n – r)!
▪ Where r < n It may be noted that:
0! = 1, 1! = 1
Permutations and Combinations
▪ A permutation is the arrangement of objects in which order is the priority. The fundamental
difference between permutation and combination is the order of objects, in permutation, the
order of objects is very important, i.e., the arrangement must be in the stipulated order of the
number of objects, taken only some or all at a time.
▪ The combination is the arrangement of objects in which order is irrelevant. The notation for
permutation is P (n, r) or nPr, denoting the number of permutations of n things when r things are
selected at a time.
▪ If there are three things a,b, and c then permutations of three things taken two at a time is
denoted by P (3, 2) or 3P2.
▪ It is given by (a, b), (a, c), (b, c), (b, a), (c, a), (c, b) = 6
▪ In general,
P (n, r) is the number of permutations when r things are selected at a time from n items.
The notation for combination is C(n, r) or nCr which is the number of combinations or selections of n
things if only r things are selected. If there are three things a, b and c then combination of these three
things taken two at a time is denoted by 3C2 and is given by (a, b), (a, c), (b, c) = 3
Example: Using 5 letter of word SHYAM, how many distinct word can be formed?
N= 5
R= 5
5P5 = 5!/ (5-5)! = 5*4*3*2/0! = 5*4*3*2/1 = 120
Note: Permutation and Combination are related to each other by formula P(n,r) = r! * C(n,r).
Example: In how many ways 3 pencils can be selected from 5 pencils?
3 pens can be selected from 5 pens in 5C3 ways
5C3 = 5! / 3! 2! × = 10 ways
Example: From a group of 7 boys and 6 girls, 3 boys and 4 girls is to be selected. In how many
ways this can be done?
3 boys can be selected from 7 boys in 7C3 ways
= 7C3 = 7! /3! 4! ×
= 7* 6 *5 *4! /3*2*4! = 35
4 girls can be selected from 6 girls in 6 C4 ways
= 6! 4! 2! = 6 *5 *4! /4! *2 = 15
3 boys and 4 girls can be selected in 7C3 × 6C4 = 35 × 15 = 525 ways.
Random Experiment or Trial
An operation or experiment conducted under identical conditions and which has a number of possible
outcomes is called Random Experiment or Trial.
Example: 1. Tossing a coin 2. Throwing a dice 3. Selecting a card form a pack of cards
Sample Space and Sample Points
The set of all possible outcomes of a random experiment is called sample space.
The elements of the sample space are called sample points. Sample space is denoted by S.
Example: 1. In an experiment of throwing a coin, S = {H,T]
2. In an experiment of throwing a dice, S = {1, 2, 3, 4, 5, 6}

The number of sample points in a sample space of random experiment is denoted by n (s).
For example, (1) n (S) = 2, and
example (2) n (S) = 6
Event
Any subset of the sample space S is called an event.

If S is a sample space and A is a subset of S (i.e., A⊂ S), then A is called an event.
Example: In an experiment of throwing dice where S = {1, 2, 3, 4, 5, 6}, the event of getting odd numbers
is A = {1, 3, 5}
Types of Events
Certain Event
• If sample points in an event are same as sample points in sample space of that random
experiment, then the event is called a certain event.
• Example: Getting any number between 1 to 6 on a dice is a certain event.
Impossible Events
• An event which never occurs or which has no favourable outcomes is called an impossible event.
In other words, the event corresponding to the set φ (null set) is called an impossible event.
• Example: Getting a number 7 on a dice is an impossible event.
Mutually Exclusive Events
• Events are said to mutually exclusive if the happening of any of them restricts the happening of
the others i.e., if no two or more of them can happen together or simultaneously in the same trial.
• Example: In tossing a coin event head and tail are mutually exclusive. Note: If A & B are mutually
exclusive events of sample space S, then A ∩ B = φ.
Example: In tossing a coin event head and tail are mutually exclusive. Note: If A & B are mutually
exclusive events of sample space S, then A ∩ B = φ.
Equally Likely Events
• Events are said to be equally likely if they have equal choice to occur. In other words, outcomes of
a trial are said to be equally likely if taking into consideration all relevant evidences, there is no
reason to prefer one with respect to other.
• Example: In throwing a dice all the six faces are equally likely to occur.
Exhaustive Events
▪ If the sample points of the events taken together

▪ Note: If A & B are exhaustive events of sample space S, then A U B = S.
▪ Example: Random Experiment:
▪ Throwing a dice S = {1,2,3,4,5,6},
▪ A= Event of odd numbers = {1, 3, 5}
▪ B= Event of odd numbers = {2, 4, 6},
▪ C= Event of multiple of 3 = {3, 6}
▪ Here A U B = {1, 2, 3, 4, 5, 6} = S,
▪ Here A and B are called exhaustive events
▪ But A U C = {1, 3, 5, 6} ≠ S,
▪ so A and C are not exhaustive events.
Complementary Event
If A is an event in sample space S, then the non-occurrence event of A is called Complementary event of
A.
Two events A and B are called complementary events, if A and B exhaustive as well as mutually exclusive
events.
In other words, A and B are called complementary events if
A U B = S and A ∩ B = φ.
Example: Random Experiment: Throwing a dice, S = {1, 2, 3, 4, 5, 6}, A = {1, 2}, B = {3, 4, 5, 6} As A U B = S
and A ∩ B = φ, A and b are complementary events.
Complementary event of A is denoted by Ac, A/ or A.
Mathematical Definition Of Probability
If the sample space S of a random experiment consists of n equally likely, exhaustive and mutually
exclusive sample points and m of them are favourable to an event A, then the probability of event A is
given by
Number of favourable items/ Total number of outcomes

Example: Two unbiased dice are thrown. Find the probability that:
• Both the dice show same number.
• First dice shows 6.
• The total of the numbers on the dice is 8.
Solution In a random throw of two dice, the total number of cases is given below:
A: Both the dice show same number

n(A)/n(S) = 6/36 = 1/6
B: First die show 6 n(B)/n(S) = 6/36 = 1/6
C: Total of the number
on the dice is 8 n(C)/n(S) = 5/36
Example: Two unbiased coins are tossed simultaneously. Find the probability of getting –
at least one tail,
majority of heads
S = {(H, H), (H, T), (T, H), (T, T)}
n (S) = 4
(i) A: At least one tail,
P (A) = n (A)/ n (S) = 3 /4

(ii) B: Majority of heads
P (B) = n (B)/ n( S) = 1/ 4
Addition Theorem
Let A and B are two events (subsets of sample space S) and are not disjoint, then the probability of the
occurrence of A or B or A and B both, in other words probability of occurrence of at least one of them is
given by,
Example: Find the probability that a card drawn from a pack of cards will be a red or a picture
card.
Probability of selecting a red card = 26 = Event A
P(A) = 26/52 = 1/2
Probability of getting picture card = 6 = Event B
P(B) = 12/52 = 3/13
There are 6 red cards which are picture cards,
P (A∩B) = 6/52
P (A U B) = P (A) + P (B) – P (A∩B)
½ + 3/13 – 6/52 = 8/13
Corollary 1:
If the events A and B are mutually exclusive, then
𝐀 ∩ 𝐁 = 𝛗𝐈 𝐏 (𝐀 ∩ 𝐁) = 𝟎 ⇒ 𝐏(𝐀 ∪ 𝐁) = 𝐏(𝐀) + 𝐏(𝐁)
Corollary 2: For three non-mutually exclusive events
𝐀, 𝐁, 𝐂 𝐏 (𝐀𝐔 𝐁 ∩ 𝐂)
= 𝐏(𝐀) + 𝐏(𝐁) + 𝐏(𝐂) − 𝐏(𝐀 ∩ 𝐁) − 𝐏(𝐁 ∩ 𝐂) − 𝐏(𝐀 ∩ 𝐂) + 𝐏(𝐀 ∩ 𝐁 ∩ 𝐂)
Corollary 3:
If A and B are any two events, then 𝐏(𝐀) = 𝐏(𝐀 ∩ 𝐁) + 𝐏 (𝐀 ∩ 𝐁 𝐂 )
Corollary 4: If 𝐀𝐂 is complementary event of A then
𝐏(𝐀𝐂 ) = 𝟏 − 𝐏(𝐀)
Corollary 5:
𝐏(𝐁 ∩ 𝐀𝐂 ) = 𝐏(𝐁) − 𝐏(𝐁 ∩ 𝐀)
Corollary 6:
𝐈𝐟 𝐀 ⊂ 𝐁
𝐏(𝐀) ≤ 𝐏(𝐁)
Corollary 7: P(Non-occurrence of events)
𝐏(𝐀𝐂 ∩ 𝐁 𝐂 ) = 𝟏 − 𝐏(𝐀 ∪ 𝐁)
Conditional Probability
▪ The conditional probability of an event A is the probability that the event will occur given the
knowledge that an event B has already occurred.
P (A/B).
▪ If the events A and B are such that the occurrence of A doesn’t depend upon occurrence of event
B, (A and B are independent event), the conditional probability of event A given event B is simply
the probability of event A, that is P (A).
▪ Similarly, probability of event B given that event A has already occurred is denoted by P (B/A).
P (B/A) = P (A ∩ B) / P(A)
Example: Consider a fair coin is tossed 3 times
S = (HHH, HHT, HTH, TTT, TTH, THT, THH, HTT) = 8
Event A = Atleast two tail appear
Event B – First coin show Head
P(A) = (TTT, TTH, THT, HTT) = 4/8 = ½
P(B) = (HHH, HHT, HTH, HTT) = 4/8 = ½
P (A ∩ B) = 1/8
P(A/B) = 1/ 8 / ½ = 1/4
Multiplication Theorem
▪ If A and B are two events of a sample space S associated with an experiment, then the probability
of simultaneous occurrence of events A and B is given by
P (A ∩ B) = P(A) P(B/A) = P(B) P(A/B)
Independent Events
Two events A and B are independent of each other if the occurrence or non-occurrence of one does not
affect the occurrence of the other.
P (A ∩ B) = P(A) P (B)
Example: Two balls are drawn from a bag one by one with 2 white and 3 black balls. What is the
probability that the second ball is white?
Event W1 = first ball - White Ball
Event B1 = First Ball – Black Ball
Event W2 = Second Ball – White Ball
1st White Ball = 2/5 + ¼
2nd Black Ball = 3/5 + 2/4
P(W2) = P(W1) + P(W2/W1) + P(B1) + P(W2/B1)
2/5 + ¼ + 3/5 + 2/4= 2/5
Random Variable
▪ A random variable is a function that associates a real number with each element in the sample
space.
▪ In other words, a random variable is a function X: S → R,
▪ where S is the sample space of the random experiment under consideration and R is the real
number line.
Example. Consider the random experiment of tossing a coin two times and observing the result (a Head
or a Tail) for each toss.
Let X denote the total number of heads obtained in the two tosses of the coin.
Example: Suppose that you play a certain lottery by buying one ticket per week. Let X be the number of
weeks until you win a prize. X is a random variable.
Discrete Random Variable:
▪ If a random variable takes a finite number or countable infinite number of possibilities, it is

called a discrete random variable.
▪ Example: 1. Age in years 2. Number of arrivals in a clinic 3. Number of accidents
Continuous Random Variable:
▪ If a random variable takes infinite number of possibilities, it is called a continuous random

variable.
▪ Example 1. Percentage of marks 2. Weight 6.5 PROBABILITY
Binomial Distribution
▪ Consider a random experiment consisting of n repeated independent trials with p the probability
of success at each individual trial. Let the random variable X represent the number of successes in
the n repeated trials.
▪ Then X follows a Binomial distribution.
The definition of this distribution is:
▪ A random variable X has a binomial distribution,
X ~ Binomial (n, p), if the discrete density of X is given by:
P[X=x] = f(x) = nCx px (1 – p)n–x,
x = 0, 1, 2..., n = 0 otherwise
f(x) = nCx px qn–x;

x = 0, 1, 2..., n = 0 otherwise where p + q = 1
P = the probability of success
n is the total number of trials.
Example: Toss a coin for 10 times and you wan to get head 4 times & probability of coming head is
0.5 calculate f(x)?
n = 10, x= 4 & p = 0.5
q = 1- 0.5 = 0.5
f(x) = nCx px qn–x
= 10C4* 0.510 o.510
Binomial Distribution Real Life Examples
Many instances of binomial distributions can be found in real life.

• If a new drug is introduced to cure a disease, it either cures the disease (it’s successful) or it
doesn’t cure the disease (it’s a failure).
• If you purchase a lottery ticket, you’re either going to win money, or you aren’t. Basically, anything
you can think of that can only be a success or a failure can be represented by a binomial
distribution.
• Mean = np
• Variance = np (1 – p) = npq
• SD = √ variance
• Measure of Skewness = â1 = (1-2p)2/npq
• Measure of Kurtosis = â2 = 3 + [1 – 6pq /npq]
• Binomial Distribution is symmetric if p = q = 0.5
• If p < 0.5, distribution is positively skewed and
• if p > 0.5, distribution is negatively skewed.
Mode
M= (n+1) p
▪ If M is not an integer, mode is the integral part lying between M – 2 and M.
▪ If M is an integer, there are two modes and thus the distribution is bimodal, and two modes
are M – 1 and M.
Problem: If X follows Binomial distribution with n = 8, p = 1/2, then Find P [IX-4I ≤ 2]
Solution : P[-2<=(X-4)<=2]
P[2<= X<=6]
P[2<= X<=6] = P(X=2) + P(X=3) + P(X=4) + P(X=5) + P(X=6)
f(x) = nCx px qn–x = 8Cx 1/2x 1/28–x
8Cx 1/2x 1/28–x =
= 8C2 1/22 1/28–2 + 8C3 1/23 1/28–3 + 8C4 1/24 1/28–4 + 8C5 1/25 1/28–5 + 8C6 1/26 1/28–6
= (1/2)8 (8C2 + 8C3 + 8C4 + 8C5 + 8C6)
= 1/256 (128+ 56+ 70 +56 +28) = 119/128
Poisson Distribution
▪ The Poisson probability distribution was introduced by S. D. Poisson.

▪ A random variable X, taking on one of the values 0, 1, 2,..., is said to be a Poisson random variable
with parameter λ, λ > 0, if its probability mass function is given by
▪ The symbol e stands for a constant approximately equal to 2.7183. It is a famous constant in
mathematics, named after the Swiss Mathematician L. Euler, and it is also the base of the so-called
natural logarithm
Some examples of Poisson probability are:
• The number of misprints on a page (or a group of pages) of a book.
• The number of people in a community living to 100 years of age
• The number of wrong telephone numbers that are dialed in a day.
• The number of transistors that fail on their first day of use.
• The number of customers entering a post office on a given day.
o Mean = λ,
o Variance = λ
o Measure of Skewness = β1 = 1 /λ
o Measure of Kurtosis β2 = 3 +1/λ
o Mode: If l is not an integer mode is the integral part lying between λ–1 and λ
o If λ s an integer, there are two modes and thus the distribution is bimodal and two modes
are λ −1 , λ
Problems. Births in a hospital occur randomly at an average rate of 1.8 births per hour.
• What is the probability of observing 4 births in a given hour at the hospital?
• What about the probability of observing more than or equal to 2 births in a given hour at the
hospital?
Let X= No. of births in a given hour = 4 with Mean rate λ = 1.8

e-1.8 = .16529
f(x) = e-1.8 * 1.84 /4!
.16529 * 10.4976/ 24 = 0.0723
(ii) We want P(X ≥ 2) = P(X = 2) + P(X = 3) +..., i.e., an infinite number of probabilities to calculate
but P(X ≥ 2) = P(X = 2) + P(X = 3) +... = 1 − P(X < 2)
= 1 − (P(X = 0) + P(X = 1)
= 1 − (0.16529 + 0.29753) = 0.538
Normal Distribution
▪ A normal distribution is a distribution that occurs naturally in many situations where 50% of the
data will fall to the left of the mean and 50% will fall to the right.
▪ For example, Height of the population, most of the people in a specific population are of average
height. The number of people taller and shorter than the average height people is almost equal,
and a very small number of people are either extremely tall or extremely short.
▪ Some other examples are distribution of Income in economy, distribution of marks in an exam,
etc.
▪ A random variable X is said to follow Normal Distribution if its pdf is given by
Note:
• µ and σ2 are called parameters of Normal Distribution.
• If µ = 0 and σ2 = 1, then the Normal variable is called Standard Normal Variable. Generally, it is
denoted by Z.
• The graph of Normal Distribution is bell shaped and symmetric.

• Quartile deviation is 0.6745σ
• Mean deviation is 0.7979σ
Mean = Median = Mode = µ
Problem: Normal population of 1000 employees has mean income Rs. 800 per day and variance 400,
Find no. of employees where income between [ P(Z= 1) = 0.3413, P(Z= 2) = 0.4772 & P(Z= 2.5) = 0.4938
P(Z= 5) = 0.5]
P (750 < x < 820)
P (x > 700)
P (x > 760)
n= 1000 , µ= 800 & σ2 = 400
Z = X- µ /σ
i)X = 750 = 750- 800/ 20 = 2.5 = 0.4938
X = 820 = 820-800 / 20 = 1 = 0.3413
= 0.4938 + 0.3413 = 0.8351 = 83.51%
ii)X = 700 = 700 – 800/ 20 = 5 = 0.5

0.5 + 0.5 = 1 = 1000 employees
n= 1000 , µ= 800 & σ2 = 400
Z = X- µ /σ
iii) X = 760 = 760-800/20 = 2 = 0.4772
0.4772 + 0.5 = 0.9772
Credit Risk
• We can apply probability concept and different formulas and laws of probability in different
practical field.
• One very important application is Credit Risk.
• When lenders offer mortgages, credit cards, any type of loan to different customers, there could
be a risk that the customer or borrower might not repay the loan.
• Similarly, if a company extends credit to a customer, there could be a risk that the customer might
not pay their invoices.
• We are interested to calculate this risk of not repaying any due payment. This is called Credit
Risk.
• Credit risk also represents the risk that a bond issuer may fail to make a payment when
requested, or an insurance company will not be able to pay a claim.
• Thus, Credit Risk is the possibility or chance or probability of a loss occurring due to a borrower’s
failure to repay a loan to the lender or to satisfy contractual obligations. It refers to a lender’s risk
of having its cash flows interrupted when a borrower does not repay the loan taken from him.
There are three types of credit risks.
Credit default Risk :
Credit default risk is the type of loss that is incurred by the lender either when the borrower is unable to
repay the amount in full or when 90 days pass the due date of the loan repayment. This type of credit
risk is generally observed in financial transactions that are based on credit like loans, securities, bonds
or derivatives.
Concentration Risk:
Concentration risk is the type of risk that arises out of significant exposure to any individual or group
because any adverse occurrence will have the potential to inflict large losses on the core operations of a bank. The
concentration risk is usually associated with significant exposure to a single company or industry or
individual.
Country risk
• The risk of a government or central bank being unwilling or unable to meet its contractual
obligations is called Country or Sovereign Risk.
• When a bank or financial institution or any other lender has an indication that the borrower may
default the loan payment, he will be interested to calculate the expected loss in advance.
• The expected loss is based on the value of the loan (i.e., the exposure at default, EAD) multiplied
by the probability, that the borrower will default (i.e., probability of default, PD).
• In addition, the lender takes into account that even when the default occurs, it might still get back
some part of the loan.
• Hence, PD * EAD is further multiplied by the estimation of the part of the loan which will be lost
in case that a default occurs (i.e., loss given default, LGD).
Expected loss = PD * EAD * (1 – LGD)
Problem: Let a credit of Rs. 2,000,000 was extended to a company one year ago. Determine the expected
loss for the exposure if the company defaults completely, where the loss given default is 50%.
Probability of default, PD = 100
Loss given default, LGD = 50%
Expected loss = 100% * Rs. 2,000,000 * (1 – 50%)
= Rs. 1,000,000
Value At Risk (VaR)
• The concept of value at risk is associated with portfolio of an individual or an organisation.

• A portfolio is a collection of different kinds of assets owned by an individual or organisation to
fulfil their financial objectives.
• One can include fixed deposit or any investment where he or she can earn a fixed interest, equity
shares, mutual funds, debt funds, gold, property, derivatives, and more in his portfolio.
• In any type of investment where one can earn fixed interest are not risky, but risk is associated
with the investments in Equity market, Mutual Funds, Gold, etc.
• Value at risk (VaR) is a financial metric that one can use to estimate the maximum risk of an
investment over a specific period.
If the portfolio value is Rs. 30,000 and if 1-month average return and standard deviation is 10%
and 12% respectively, calculate daily VaR at 95% confidence level.
VAR at 95% confidence level
= [Return of the portfolio –1.65 *σ][ Value of the portfolio]
= [0.1–1.65*0.12] *30000
= [0.1 –0.198] *30000 = –2940 = 9.8% of the portfolio.
CAIIB Paper 1 (ABM) Module A Unit 7: Estimates

Estimates
Estimation refers to the process by which one makes inferences about a population, based on
information obtained from a sample.
We can make two types of estimates about a population: a point estimate and an interval estimate. A
point estimate is a single number that is used to estimate an unknown population parameter If, while
watching a cricket team on the field, you say. 'Why, I bet they will get 350 runs,' you have made a point
estimate. A department head would make a point estimate if she said, 'Our current data indicate that this
course will have 350 students next year.'
Estimator And Estimates
Asample statistic that is used to estimate a population parameter is called an estimator. The sample
mean x can be an estimator of the population mean µ, and the sample proportion can be used as an
estimator of the population proportion. We can also use the sample range to estimate the population
range. When we have observed a specific numerical value of our estimator, we call that value as an
estimate. In other words, an estimate is a specific value of a statistic or an estimator. We form an
estimate by taking a sample and computing the value taken by our estimator in that sample. Suppose, we
calculate the mean odometerreading (mileage)from a sample of used taxis and find it to be 98,000 miles.
If we use this specific value to estimate the mileage for a whole fleet of used taxis, the value 98,000 miles
would be an estimate.
Criteria of a Good Estimator
Some statistics are better than others. Fortunately, we can evaluate the quality of a statistic as an
estimator by using four criteria:
• Unbiased: This is a desirable property for a good estimator to have. The term unbiased refers to
the fact that a sample mean is an unbiased estimator of a population mean because the mean of
the sampling distribution of sample means taken from the same population is equal to the
population mean itself.
• Efficiency: Another desirable property of a good estimator is efficiency. Efficiency refers to the
size of the standard error of the statistic. If we compare two statistics from a sample of the same
size and decide which one is the more efficient estimator, we would pick the statistic with the
smaller standard error or standard deviation of the sampling distribution.
• Consistency: A statistic is a consistent estimator of a population parameter if, as the sample size
increases, it becomes almost certain that the value of the statistic comes very close to the value of
the population parameter. If an estimator is consistent, it becomes more reliable with large
samples.
• Sufficiency: An estimator is sufficient if it makes so much use of the information in the sample
that no other estimator could extract from the sample, additional information about the
population parameter being estimated.
Point estimate
• A point estimate is often insufficient, because it is either right or wrong. If you are told only
that her point estimate of enrollment is wrong, you do not know how wrong it is, and you
cannot be certain of the estimate's reliability.
• If you learn that it is off by only 10 students, you would accept 350 students as a good estimate of
future enrollment. But if the estimate is off by 90 students, you would reject it as an estimate of
future enrollment. Therefore, a point estimate is much more useful if it is accompanied by an
estimate of the error that might be involved.
Interval estimate
• An interval estimate is a range of values used to estimate a population parameter. It

indicates the error in two ways: by the extent of its range and by the probability of the true
population parameter lying within that range. In this case, the department head would say
something like, 'I estimate that the enrollment in this course next year will be between 330 and
380 and that it is very likely that the exact enrollment will fall within this interval.'
• She has a better idea of the reliability of her estimate. If the course is taught in sections of about
100 students each, and if she had tentatively scheduled five sections, then on the basis of her
estimate, she can now cancel one of those sections and offer an elective instead.
Estimator
A sample statistic that is used to estimate a population parameter is called an estimator.

Criteria of a Good Estimator
Some statistics are better than others. Fortunately, we can evaluate the quality of a statistic as an
estimator by using four criteria:
• Unbiased: This is a desirable property for a good estimator to have. The term unbiased refers to
the fact that a sample mean is an unbiased estimator of a population mean because the mean of
the sampling distribution of sample means taken from the same population is equal to the
population mean itself.
• Efficiency: Another desirable property of a good estimator is that it be efficient. Efficiency refers
to the size of the standard error of the statistic.
• Consistency: A statistic is a consistent estimator of a population parameter if as the sample size

increases, it becomes almost certain that the value of the statistic comes very close to the value of
the population parameter.
• Sufficiency: An estimator is sufficient if it makes so much use of the information in the sample
that no other estimator could extract from the sample additional information about the
population parameter being estimated.
Relationship between Confidence Level and Confidence Interval
• You may think that we should use a high confidence level, such as 99 per cent, in all estimation
problems. After all, a high confidence level seems to signify a high degree of accuracy in the
estimate. In practice, however, high confidence levels will produce large confidence intervals, and
such large intervals are not precise; they give very fuzzy estimates.
• There is a direct relationship that exists between the confidence level and the confidence interval
for any estimate. As you set a tighter and tighter confidence interval, you would get to a lower and
lower confidence level.
Confidence Intervals
Statisticians use a confidence interval to express the precision and uncertainty associated with a
particular sampling method. A confidence interval consists of three parts.
▪ A confidence level.
▪ A statistic.
▪ A margin of error.
The confidence level describes the uncertainty of a sampling method. The statistic and the
margin of error define an interval estimate that describes the precision of the method. The interval
estimate of a confidence interval is defined by the sample statistic + margin of error.
For example, suppose we compute an interval estimate of a population parameter. We might

describe this interval estimate as a 95% confidence interval. This means that if we used the same
sampling method to select different samples and compute different interval estimates, the true
population parameter would fall within a range defined by the sample statistic + margin of
error 95% of the time.
Confidence intervals are preferred to point estimates, because confidence intervals indicate (a) the
precision of the estimate and (b) the uncertainty of the estimate.
Confidence Level
The probability part of a confidence interval is called a confidence level. The confidence level
describes the likelihood that a particular sampling method will produce a confidence interval that
includes the true population parameter.
Here is how to interpret a confidence level. Suppose we collected all possible samples from a given
population, and computed confidence intervals for each sample. Some confidence intervals would
include the true population parameter; others would not. A 95% confidence level means that 95%
of the intervals contain the true population parameter; a 90% confidence level means that 90% of
the intervals contain the population parameter; and so on.
Margin of Error
In a confidence interval, the range of values above and below the sample statistic is called
the margin of error.
For example, suppose the local newspaper conducts an election survey and reports that the
independent candidate will receive 30% of the vote. The newspaper states that the survey had a
5% margin of error and a confidence level of 95%. These findings result in the following
confidence interval: We are 95% confident that the independent candidate will receive between
25% and 35% of the vote.
Note: Many public opinion surveys report interval estimates, but not confidence intervals. They
provide the margin of error, but not the confidence level. To clearly interpret survey results you
need to know both! We are much more likely to accept survey findings if the confidence level is
high (say, 95%) than if it is low (say, 50%).
Consider the following results of 10 tosses of a coin: H, T, T, T, T, H, T, H, T, T a) Estimate the

probability of head (H) for this coin. b) Estimate the standard error of your estimate.
Let X denote the toss of a single coin. Further, let X = 1 if a head results, and X = 0 if a tail results.
This X is a Bernoulli (p) random variable, where p denotes the probability of head. Let pˆ denote
the estimator of p.
a) The estimated value of p is pˆ = (1 + 0 + 0 + . . . + 1 + 0 + 0)/10 = 0.3.

b) The estimated standard error of pˆ is √pˆ(1 − pˆ)/n) = √0.3(0.7)/10 = 0.14.
Suppose the following data shows the number of the problems from the Practice Problems Set
attempted in the past week by 10 randomly selected students: 2, 4, 0, 7, 1, 2, 0, 3, 2, 1.
a) Find the sample mean.

b) Find the sample variance.
c) Estimate the mean number of practice problems attempted by a student in the past week.
d) Estimate the standard error of the estimated mean.
a) X = Pn i=1 Xi/n = (2 + 4 + . . . + 2 + 1)/10 = 2.2

b) S^2=∑n i=1(Xi − X)^2/(n − 1) = (2 − 2.2)^2 + (4 − 2.2)^2 + . . . + (2 − 2.2)^2 + (1 −

2.2)^2/(10−1) = 4.4
c) The estimate is X = 2.2
d) Estimated standard error of X is S/√ n = √ 4.4/10 = 0.66
Linear Programming refers to several related mathematical techniques that are used to allocate limited
resources among competing demands in an optimal way. For obtaining the optimal solution the
problems should be structured into a particular format. It has been found that linear programming has
many useful applications to financial decisions. The type of problems should have linear constraints and
the decision maker must be trying to maximise some linear objective function.
In this chapter we will discuss graphical and ‘simplex’ methods.
Model
Let us assume that the selling prices, production and marketing costs are known for each of the ‘n’
products. The firm also has to operate under certain economic, financial and physical constraints. Some
examples of resource and marketing constraints:
• Bank may stipulate certain working capital requirements.
• Market may not absorb the whole output.
• Capacity constraints.
• Labour availability.
• Raw materials availability.
These constraints can be used to formulate the problem. The question is how to attain maximum profit
minimum loss or minimum cost or time in the given circumstances? Maximum or minimum value can be
obtained by forming and solving Linear Programming Problem.
Thus, Linear Programming Problem is a method by which a function (profit, loss, time, cost, etc.) can be
maximised or minimised (optimised) with respect to some conditions. The function which has to be
maximised or minimised (optimised)) is called objective function and the conditions are called
constraints. The variables related to a linear programming problem whose values are to be determined
are called Decision variables.
Under what conditions a Linear Programming problem can be formulated?
• As the name implies all equations are linear – This implies proportionality. For example, if it takes
4 persons to produce one unit, then we require 12 persons to produce 3 units.
• The constraints are known and deterministic. That is, the probabilities of occurrence are
presumed to be 1.0.
• Most important rule is that all these variables should have non-negative values.
• Finally, decision variables are also divisible.
Graphic Approach
Let us illustrate the graphic approach with simple numerical two-decision variables. (3 variables require
3-D graphing). This gives a quick insight into the nature of L.P.
Let firm A produce radios and television sets.
Each radio costs Rs. 500 in wages and Rs. 500 in materials.
Each television set costs Rs. 2,500 in wages and Rs. 1,500 in materials.
The firm pays the labour and material expenses in cash.
The price of a radio is Rs. 2,000 and the price of a television is Rs. 6,000.
As there is a strong consumer demand, the firm is able to sell as many units as it produces at prevailing
prices.
The firm also gives one period credit to consumers. The firm has 10 hours of machine time and 4 hours
of assembly time per day.
The production of radio requires 3 hours of machine time and 1 hour of assembly time. The production
of television requires 1 hour of machine time and 1 hour of assembly time.
The firm has Rs. 12,000 as cash balance (liquidity to pay for labour and materials). Now, given the
financial and capacity constraints, how many radios and televisions should the firm produce in period 1,
to maximise its profits?
Let x and y be respectively, the units of radios and television sets produced in period 1. Then the
constraints are:
(a) (capacity constraint machine time) 3x + y £ 10
(b) (capacity constraint assembly time) x + y £ 4
(c) (financial constraint) 1000x + 4000y £ 12,000 ® same as x + 4y £ 12
(d) (non-negativity) x ³ 0; y ³ 0;
(e) Objective function: Maximise Profit = 1,000x + 2,000y Now, let us draw the graph.
We have plotted the above three constraints in the graph. Find all the combinations of x and y, which
satisfy the constraint and plot the points for all 3 lines. The graph is in the 1st quadrant. This satisfies the
non-negativity condition.
• All points on or below (inside) the line satisfy, x + y £ 4.
• All points on or below the line 3x + y £ 10, satisfy the machine time constraint.
• All points on or below the line x + 4y £ 12, satisfy financial constraint.
Even though all constraints are listed separately, they should be satisfied simultaneously. When these
restrictions are placed one on top of the other, we obtain a common area, which in this case is shaped
like a pentagon. (say ABCDE). Every point in this pentagon satisfies the constraints. This area is referred
to as a set of feasible solutions.
Now, our objective is not to pick any feasible solution.
Although x = y = 0 is also a feasible solution, the profit will be zero.
This means no production of either radio or television. We are not seeking such a solution. So, our
objective is to pick that feasible solution (that particular combination of x and y), from the set of feasible
solutions, which maximises profit.
Simplex Method
Another method of solving linear programming is Simplex Method. This method is a standard technique
in linear programming for solving an optimisation (maximisation or minimisation) problem, typically
one involving an objective function and several constraints expressed as inequalities. With computer
programmes, spread sheets available, it is possible to use this method effectively and solve equations
with as many as 10–12 variables.
Let us take the following problem to use Simplex Method.
Problem
A company manufactures cricket bats and chess sets. Each cricket bat gives a profit of Rs. 2 and chess set
gives a profit of Rs. 4.
If the company wants to maximise the profit, how many cricket bats and chess sets should be produced
per day?
Step 1 Solution: Formulate the problem.
Let the production be ‘B’ bats and ‘C’ chess sets.
(a) Objective function: Maximise Z = 2B + 4C
(b) 4B + 6C £ 120 (Workshop 1)
(c) 2B + 6C £ 72 (Workshop 2)
(d) 1C £ 10
(e) B, C ³ 0
We now change this to standard LP format.
In the standard LP form, all the constraints are converted into equations with the help of slack variables.
Also make sure that these equations have non-negative right hand side. For example, 4B + 6C £ 120 is
changed to 4B + 6C + m = 120 Here m is called a slack variable. It takes non-negative values. In fact all
the variables in these equations take non-negative values.
The standard LP format is as follows:
(a) Objective function Maximise Z = 2B + 4C + 0 m + 0 n + 0 p
(b) 4B + 6C + 1m = 120 (Workshop 1)
(c) 2B + 6C +1n = 72 (Workshop 2)
(d) 1C + 1p = 10
(e) B, C ³ 0; m, n, p ³ 0 where m, n, p are the slack variables.
Z equation is also written as Z – 2B – 4C – 0 m – 0 n – 0 p = 0. Now, make a tableau as follows
Simulation
Simulation is appropriate to situations where size and/or complexity of the problem make the
use of other techniques difficult or impossible. For example, queuing problems have been extensively
studied through simulation. Some types of inventory problems, layout and maintenance problems also
can be studied through simulation. Simulation can be used with traditional statistical and management
techniques.
Simulation is useful in training managers and workers in how the real system operates, in
demonstrating the effects of changes in system variables and real-time control. Simulation is extensively
used in driving lessons. The person who learns driving is made to face the real road situations (traffic
jams and other problems) during learning, so that serious accidents can be avoided. Simulation is
commonly used in financial world such forex, investment and risk management areas.
Application of simulation methods:
• Air Traffic control queuing
• Aircraft maintenance scheduling
• Assembly line scheduling
• Inventory reorder design
• Railroad operations
• Facility layout
• Risk modeling in finance area.
• Foreign exchange market
• Stock market
Example:
The owner of an outlet wishes to evaluate his daily ordering policy. His current rule is order the demand
of the previous day. But he has started thinking recently that he should follow better methods to
decide the quantum of order.
He purchases milk at Rs 12 and sells at Rs 16. He orders his requirement at the end of the day and gets
the milk in the morning. From past experience, the vendor assessed that his demand is between 30 and
80 liters per day.
He also kept a record of relative frequency of the quantity demanded during the last 10 days. Now he
thinks of a new ordering rule — mean of quantity sold in the last 10 days.
He maintained the sales in a tabular form. The table has two columns. The first column shows the
Demand and the second one shows the Relative frequency, that is, in the selected period of 10 days,
how many times such demand occurred.
Demand per day in Litres Relative Frequency

35 1/ 10, that is, only one day, out of ten
days, demand of 35 litres occured
45 3/10, that is, only three days, out of
ten days, demand of 45 litres occured
55 2 /10, that is, only two days, out of
65 3/10, that is, only three days, out of
75 1/10, that is, only one day, out of ten
days, demand of 75 litres occured
He settles for the ordering rule

[(35 × 0.1) + (45 × 0.3) + (55 × 0.2) + (65 × 0.3) + (75 × 0.1)] = 55 litres.
So we have 2 rules: Old rule and New rule. Representing mathematically,
Old rule = quantity demanded on previous day is equal to D (n - 1).
New rule = Mean of the past 10 days is equal to 55
Now let us compare these orders in terms of profits.

Profit ‘P’ is equal to (Sold Quantity × selling price (p)) - (Ordered quantity × cost price (c)).
Assume that the unsold milk packets are thrown away as they are perishable. Now to prepare for simulation,
we have to develop a method for demand generation. Let us use the probability distribution of demand and
random numbers to generate a demand for the next 20 days.
Now arrange the chance process to generate occurrences in the system.
Demand Per Relative Probability Random

Day Number
Frequency
Interval
35 1/ 10 0.1 00 to 09
45 3/10 0.3 10 to 39
55 2/10 0.2 40 to 59
65 3/ 10 0.3 60 to 89
75 1/ 10 0.1 90 to 99
With the above table and random numbers, we develop the demand for 20 days.
Step 1: Choose a random number.
Step 2: Find the random number interval associated with the random number.
Step 3: Read the daily demand corresponding to the random number interval.
Step 4: Assume D = 55 litres for day 0
Step 5: Calculate the quantity sold. Quantity sold will be lesser of the demand D or Quantity ordered Q1
(or Q2)
Step 6: Profit = (Sold quantity × selling price) - (Ordered quantity × cost price).
Selling Price is Rs 16 per litre and cost price is Rs 12 per litre
Step 7: Do all steps for 20 days to simulate.
Day RN D Q1 S1 PR-1 Q2 S2 PR-2

(random (demand (quantity (quantity (rupees) (quantity (quantity (rupees)
number related to ordered sold profit ordered) sold profit
respective based under under (mean under under
random on old old of new old
number demand method) method quantity method) method
interval) of (lesser (16 into sold in (lesser (16 into
previous of D and S1)- (12 last ten of D and S1)- (12
day) Q1) into days) Q2) into
Q1) Q1)
0 55
1 6 35 55 35 –100 55 35 –100
2 39 45 35 35 140 55 45 60
3 89 65 45 45 180 55 55 220
4 61 65 65 65 260 55 55 220
5 99 75 65 65 260 55 55 220
6 95 75 75 75 300 55 55 220
7 55 55 75 55 -20 55 55 220
8 35 45 55 45 60 55 45 60
9 57 55 45 45 180 55 55 220
10 59 55 55 55 220 55 55 220
11 30 45 55 45 60 55 45 60
12 81 65 45 45 180 55 55 220
13 2 35 65 35 -220 55 35 -100
14 18 45 35 35 140 55 45 60
15 87 65 45 45 180 55 55 220
16 68 65 65 65 260 55 55 220
17 28 45 65 45 -60 55 45 60
18 44 55 45 45 180 55 55 220
19 80 65 55 55 220 55 55 220
20 84 65 65 65 260 55 55 220
Total 1120 1110 1000 2680 1100 1010 2960
Average 56 55.5 50 134 55 50.5 148
We now see that the average demand according to simulation is 56 litres, Average sales
is 50 litres, according to old method; and 50.5 litre according to new method. Average
order is 55.50 litres under old method, whereas 55 hires under new method.
Thus you would find that profitability improves under the new method.
Simulation Methodology
START Key factors
DEFINE PROBLEM Define objectives and variables
CONSTRUCT THE SIMULATION Specification of variables, parameters,

MODEL decision rules, probability distribution
and time incrementing procedure —
(fixed or variable)
SPECIFY VALUES OF PARAMETERS & Determine starting conditions and run
VARIABLES RUN THE SIMULATION length
EVALUATE RESULTS Determine statistical tests
PROPOSE NEW EXPERIMENT Compare with other information
Stop
Advantages
Simulation is desirable when experiments on the real system

• Would disrupt ongoing activities;
• Would be too costly to undertake;

• Require many observations over an extended period of time;
• Do not permit exact replication of events; and
• Do not permit control over key variables.
Simulation is preferable when a mathematical model
• is not available to handle the problem;

• is too complex and arduous to solve;
• is beyond the capability of available personnel; and
• is not robust enough to provide information on all factors of interest.
Disadvantages
• Time consuming.
• Requires computer experience and expertise on the part of the user.
• Impossibility of quantifying and difficulty of casting complex problems in a
format may cause difficulties; but simulations can be made to run under any type
of assumption and these flaws can be overlooked.
• In spite of widespread applications, there are very few principles to guide the
user in making decisions on what to include in the model and the length and
number of simulation runs. This will be more like an art than science. The user
has to use his intuitive judgments.

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JAIIB_CAIIB_2024_NOTES_MCQs

CAIIB Paper 1 (ABM) Module A: STATISTICS

CAIIB Paper 1 (ABM) Module A Unit 1: Definition of Statistics,

The word ‘Statistics’ has been derived from the

• Statistics present the facts in definite form.

Limitations Or Demerits Of Statistics

Primary Data Secondary Data

Classification and Tabulation

• If we classify observed data for a single characteristic, it is known as One-way Classification.

Class Length or Class Width

Inclusive Type Class Interval

Exclusive Type Class Interval

Frequency density of a class interval = Class frequency/Width of Class

Continuous Frequency Distribution:

CAIIB Paper 1 (ABM) Module A Unit 2: Sampling Methods

Sampling is a process used in statistical analysis in which a predetermined number of observations

There are two methods of selecting from populations

Type of Random Sampling

There are four main type of random sampling

i)Simple Random Sampling (SRS)

iii) Cluster Sampling

iv) Systematic Sampling

Sample Distribution Table

SAMPLES, their DATA & Mean

CONCEPT of STANDARD ERROR

Sampling From Normal Population

Standard Error Of The Mean For Infinite Populations:

Central Limit Theorem

STEP 1 : Calculate Standard error

Finite Population Multiplier

Standard Error Of The Mean For Finite Populations

CAIIB Paper 1 (ABM) Module A Unit 3: Measures of Central Tendency

Example 1: Consider the marks scored by 10 students in Mathematics in a certain examination

Example 2: Find the Arithmetic mean for following:

Combined Arithmetic Mean

Merits of Arithmetic Mean

Demerits of Arithmetic Mean

• It is highly affected by extreme values.

• It is used in stock indexes.

Example: Find the G.M. for the following data

Merits of Geometric Mean

• It is useful in the construction of index numbers.

• It cannot be easily understood.

• It is used in finance to find average of different rates.

H.M = n / (1/x1 + 1/x2 + 1/x3+ ….. 1/y)

N /( F1/X1 + F2/X2 + F3/X3….)

Comparison between Arithmetic, Geometric and Harmonic Mean

▪ A.M. × H.M. = (G.M.)^2

Median And Quartiles

▪ A quartile represents the division of data into four equal parts.

Calculate Q1,Q2 & Q3

Q3 = l1 + (q3- CF)/f (l2-l1)

• It is easy to calculate and understand.

• It is ill defined as it is not based on all observations.

Relationship among Mean, Media and Mode

• Mode = 3 Median – 2 Mean

Introduction to Measures Of Dispersion

Range and Coefficient Of Range