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Quantitative analysis techniques are those that study behavior by using mathematical
modeling, measurement and research. This relates to giving a numerical value to variables.
Quantitative analysts try to replicate reality through mathematics. Quantitative analysis involves
measurements. Initially, quantitative analysts were involved only in investment management,
risk management, and derivatives, now quantitative analysis is used in a wide variety of
The business of interest is the company in which I work. The firm makes molded plastic
toys. The firm faces problems when the trends and tastes related to toys change and the type of
toys made by the firm do match the market demand. Large inventories of toys have to be written
off. Quantitative analysis can help the company in several ways.
First we consider the mathematical example of investing in new projects where my
company invests in plastic molding plants. The sensitivity of the project net present value to
different inputs needs to be tested. The best practice is to construct a probabilistic model and use
Monte Carlo simulation to analyze the project net present value. In the molded toy business the
Monte Carlo model includes the possibility of risk events (e.g. a sudden change in demand for
toys) that affect variations in the NPV model inputs. If my company invests in appropriate
projects it brings in more revenues and helps reduce costs. For instance, if the net present value
of three projects fluctuates between -0.2 million and 1.2 million, -1.2 million and 2.3 million,
and 0.1 million and 1.6 million, and if my company wants to avoid the chance of loss then it will
select the third project.
Second example of quantitative analysis being used by my firm is achieving the target
capital structure. The company uses debt to equity ratio as the target capital structure. The best
practice developed is to set the industry debt equity ratio as the target and then strive towards
achieving it. Arithmetically, the debt equity ratio is calculated by dividing the liabilities by
stockholder’s equity. This shows the proportion of equity and debt the company uses to finance
its assets. The calculation of debt/equity ratio helps the company to have a well-balanced capital
structure. For example if my company uses too much debt then the cost of debt financing may
outweigh the return that the company generates on the debt leading to insolvency. At the same
time if the company uses too less debt then it is not making full use of opportunities. For
instance, if the industry debt equity ratio is 1.56 and my company ratio is 2.23 then my company
needs to reduce the proportion of debt in its capital structure.
The third mathematical example is that of using factor analysis to recognize the
underlying dimensions that affect the demand and trends for plastic molded toys. The company
needs to spot the main attributes toy users use to evaluate products, uses quantitative market
research to collect data from sample customers, input the data into a statistical program, and use
the factors to construct perceptual maps. Factor analysis can help my company overcome the
problem of not understanding the customer trends. The reason for this is that subjective and
objective attributes are converted into scores. Hidden dimensions are identified. The statistical
program will carry out Varimax rotation that uses orthogonal rotation of the factor axes to
maximize the variation of the squared loadings on all the variables in a factor matrix. The main
advantage of Varimax solution is that it is easily possible to identify each variable with a single
The fourth example of quantitative analysis that may be used is time series analysis. This
analysis is needed for the forecast of certain toys like molded dolls, the demand for which is
related to historical data. This analysis will help reduce the cost of unsold inventory being
written off. The mathematical example is that of collecting time series data, seasonal removal
using smoothing techniques, trend removal using regression, and cyclical removal using percent
ratio. This process should be reversed to get the forecast. The future trend level using the trend
equation should be used to compute the future trend, next the period seasonal index should be
multiplied to get seasonal index, and the result should be multiplied to get the final forecast
result. For instance, if my company gets a forecast figure of 20,000 type 3 dolls, this information
can be included in the manufacturing plan and the possibility of loss from overstock/under-stock
can be avoided.
The use of quantitative analysis in business has increased. It is used in trading and sales
to determine prices, manage risk, and find profitable opportunities. Asset managers use
quantitative analysis, risk managers use these techniques, and marketing research managers use
it. The use of these techniques in the firm that I work can help reduce costs and increase
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