Hotel Finance

JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

ICS 2307 – SIMULATION AND MODELING

JOSEPH MUTHINJI NJOKI

Bit-001-2330/2010

1. Summarize what hypothesis testing is about. Provide an example. [2 marks]

Hypothesis is the statistical technique or procedure for verifying the truth or falsehood of a belief or claim in respect to a given population. Hypothesis testing involves comparing sample point estimates (means or proportions) to population estimates or other sample point estimates for the purposes of determining the probability the sample data you are "testing" are significantly different from the population estimates or the other sample data. Similar to confidence interval estimates, the analyst selects a certain level of confidence, in the case of hypothesis testing, this would actually be a significance level of 0.05, as a threshold for making the resulting determination. 

2. Describe Monte Carlo Simulation [3 marks]

It is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making. The technique is used by professionals in such widely disparate fields as finance, project management, energy, manufacturing, engineering, research and development, insurance, oil & gas, transportation, and the environment.

Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur for any choice of action. It shows the extreme possibilities—the outcomes of going for broke and for the most conservative decision—along with all possible consequences for middle-of-the-road decisions.

3. With an example, show how Monte Carlo technique of simulation can be used in predicting profits in a business environment [8 marks]

It builds models of possible results by substituting a range of values—a probability distribution function—for any factor that has inherent uncertainty. It then calculates results over and over, each time using a different...