Chapter 6: Build A Model

Ch06 P14 Build A Modelspring 1 201372212chapter 6 Ch 06 P14 Build

Build a model based on data and tasks described, including calculating returns, standard deviations, coefficients of variation, creating scatter diagrams, estimating betas via regression lines, calculating required returns using the Security Market Line, and constructing a portfolio's beta and return. Also, design a user interface, source document, and data validation rules for a school management system at Willowbrook School based on a detailed case study.

Sample Paper For Above instruction

Introduction

This paper provides a comprehensive analysis and model development based on financial data calculations and the design of an information system for Willowbrook School. The first section covers financial metrics like returns, standard deviations, and beta estimations, along with constructing a portfolio, while the second focuses on system design, including user interface, source documents, and data validation strategies tailored for the school's needs.

Financial Data Analysis and Modeling

To begin, the calculation of annual returns for Bartman Industries, Reynolds Incorporated, and the Market Index is essential. The data provided includes stock prices and dividends over the specified period. For 2010, the return calculation involves taking the ending price, subtracting the beginning price, adding the dividends received, and dividing this sum by the starting price. For example, Bartman Industries' 2010 return is calculated as (Ending Price - Beginning Price + Dividends) / Beginning Price. Since data for previous years are not available, the calculation is limited to 2010, but an average over multiple years would involve similar calculations for each year, then averaging the annual returns.

Next, computing the standard deviation of returns performed via Excel's STDEV function provides insight into the volatility of each asset. Coefficient of variation—defined as standard deviation divided by the mean return—offers a risk-to-return ratio for each entity. These metrics assist investors in assessing the relative risk of each security.

In constructing a scatter diagram, the returns of Bartman and Reynolds are plotted against the Market Index's returns to visualize correlation and potential linear relationships. The scatter plot is prepared in Excel with the Index returns in the X-axis column, and the individual stocks' returns on the Y-axis. Using Excel's chart wizard, the scatter plot without connecting lines allows for visual analysis of return relationships.

Regression analysis estimates the stock's beta by determining the slope of the line fitting the return data. Excel’s SLOPE function calculates these slopes, which indicate each stock’s sensitivity to market movements. The betas are then compared to the visual regression lines to verify consistency.

The expected market return, based on the risk-free rate of 6.04% and the market risk premium of 5%, sums to approximately 11.04%. Using the Security Market Line (SML), the required return for each stock is computed as the risk-free rate plus the beta times the market risk premium. These calculations determine the implied minimum return an investor should expect, given the systematic risk of each stock.

When combining stocks into a portfolio, the beta of a 50% Bartman and 50% Reynolds portfolio is calculated as the weighted average of individual betas, which reflects overall systematic risk. Subsequently, the portfolio’s required return is calculated using the weighted beta and the SML framework.

Further, the addition of Bartman stock to a diversified portfolio composed of stocks with known betas allows for calculation of the new portfolio’s beta and required return using weighted averages and the SML formula.

Willowbrook School System Design

The second part of the analysis involves designing a comprehensive information system for Willowbrook School, considering its specific operational needs. A task list is constructed by analyzing the case details, such as managing student records, attendance, staff schedules, billing, and after-care programs. Tasks are estimated in terms of time frames, with order dependencies identified based on the logical flow of information processing, similar to project management techniques illustrated in Figures 3-25 and 3-30 of the course text.

A Gantt chart is developed to illustrate phases, milestones, and durations of activities, enabling visualization of the project timeline. This includes tasks such as interviewing staff, designing database schema, developing user interfaces, and testing. A PERT network diagram complements this by showing task sequences and estimating project completion time, highlighting critical tasks that directly impact project duration.

The critical path—comprising tasks with the longest duration—determines the minimum project completion time. Identifying and managing this path ensures timely project delivery, as any delay in critical tasks postpones the overall project. As a project manager, monitoring the critical path metrics guides resource allocation and contingency planning.

User Interface and System Components

Designing a switchboard involves creating control buttons that lead to system modules such as Student Management, Staff, Classrooms, After-Care, and Payments. Each component has associated data entry screens with options to add, update, or delete records, including user-friendly navigation and context-sensitive help features for ease of use.

Storyboards depict menu flow and data entry forms, illustrating how end-users interact with the system. For example, the student registration form includes fields for student details, parent contact info, and class assignment, with validation prompts for required fields and proper formats.

Additionally, a source document for parent registration is designed, including fields like child's name, age, parent contact info, desired class, and health information, ensuring data completeness and accuracy at entry points.

Data validation rules ensure data integrity, including rules such as mandatory fields, numeric ranges for age and phone numbers, date formats for birthdates and registration dates, and consistency checks for class assignments. These rules promote reliable data entry and support report accuracy.

Conclusion

The combined financial modeling and system design approach provides a comprehensive framework for decision-making and operational improvements. Implementing these models and systems can lead to better risk assessment, resource management, and workflow automation, ultimately enhancing the efficiency and effectiveness of the school's administration and financial management.

References

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