Case+2

=Case Facts & Issues=

= Case Facts Summary  = As International Investment, Inc., we offer worldwide financial services to businesses and individuals. We specialize in buying and selling stocks through the New York, London, and Tokyo exchanges. Our firm must narrow down as to which foreign markets to invest in order to minimize any risk of non-performing portfolios. As employees of International Investments, Inc., we are asked to research, and determine the best method to use when investing in global markets. Based on our concrete outcome, we will use our findings as a foundation for recommending global investments for our clients. In general, investment firms use macroeconomic variables when making decisions on stock selections. In order to predict which country will do better than the other, firms use economic indicator such as, interest, and unemployment rates. Not all of our financial analysts use this method since the sole use of macroeconomic variables is considered to be not enough. To limit the risk factor to its minimal, our financial analysts also oversee the performance of individual firms when making their selection of stocks.

In order for us to evaluate the issue regarding which method to be used in our firm when making investment decisions, we have concluded that statistical analysis is required. Our research will also include testing the relationship between economic and stock market performance. With the use of macroeconomic variable data available to us, we will consider using variables such as, unemployment rate, interest rate, inflation, and per capita gross national income(GNI).

Primary Issues to Consider
In today’s flat world, global economy has risen to the point where it has caused a change in the way investment firms manage their portfolios. Since national borders allow transactions in the stock markets of foreign countries, it has created an opportunity for many investment firms to transact, and expand their stock portfolios. By doing so, they are creating a risk on their investment due to the fact that the economic performance fluctuates from one country to another. In addition, by not eliminating the above-mentioned risk factor, this may have a positive effect by not solely relying on a single country’s economic performance. Having the stocks held in multiple countries, this will minimize the risk due to establishing investments in a global aspect. In our previous research, we have concluded that interest rates play a highly significant role in evaluating the country’s stock market performance. We must perform the hypothesis test to conclude if whether or not the use of national interest rates is a good variable to consider.

Q.1 a: The standard deviation and the mean are the most popular methods for numerically describing the distribution of a variable. Mean is generally the average value of a given data, and it is also called arithmetic mean, the arithmetic mean of a variable is the sum of all the values of the variable divide by the number of the sample observation. (Michael 121) In this International Investment case, our team is given a sample of population of interest of all countries in the world. The sample is data of interest rates, market index, and inflation rates, etc. of eighteen countries. So in this case our team used sample arithmetic mean for the percent changes in market indices and the percent changes in interest rate. But before calculating the mean, we have to find the percent change in market indices and the percent change in interest rates of the eighteen counties in the year of 2005 and 2006, so we used the formula, Percent change =, to find the Percent changes of market index and interest rates in 2005 and 2006 of those eighteen countries. After calculating the percent changes, we applied the formula of mean, which is to find the mean of percent changes in market indices and in interest rate in the year of 2005 and 2006, which are 30.48 and 97.19. Those two numbers indicated that the average change in market indices of those eighteen countries is 30.48, and the average change in interest rate is 97.19. Then we started to find the standard deviation of the percent changes in market indices and in interest rate in the year of 2005 and 2006. We used the formula of sample standard deviation, s = to find the standard deviations of those two variables, which are 14.56 and 251.75. Those two numbers indicate the variability of percent changes in market indices and in interest rate in the year of 2005 and 2006. By analyzing the mean and the standard deviation we concluded that Japan is not in the normal range of percent change, there must be some other factors affected Japan’s market index during those particular years, and also Mexico is the only one country has a negative change in interest rate with positive change in market indices, there could be some other factors, like reducing government spending, increasing public saving, or short period of high defilation rate. But we could not give an absolute conclusion, because we needed more information and further analysis. Q1 b: After extracting all those numbers and data, we decided to run two hypothesis tests to see if the mean percent changes in stock market indices and in interest rates are significantly different from zero, and the significance was given 0.05. The reason that we need to run this hypothesis test against the mean of percent changes in stock market indices and in interest rates are equal to zero, which can be written in the test as H ₀ , µ=0, because we need to test if the sample size has the significant power to give a reliable statistical predication for the entire population with in this case is all the countries in this world, which also means that we needed to test if this sample had unreasonable errors. We used the T test to test this sample data, because we did not have the mean of population, and the number of sample is less than 30. We assumed the null hypothesis (H ₀ ) is µ=0, which we wanted to prove is wrong, and then we assumed the alternative hypothesis (H ₁ ) is µ≠0, which means that there are some significant changes in the data of stock market value during the year of 2005 and 2006, which is conclusion that we wanted to have. Then we applied all the data to the formulae of T-test is the mean of the percentage change in stock market of those eighteen countries during 2005 and 2006, µ=0, and S=14.56, and n is the number of the sample, which is eighteen. So we found the sample t equals to 8.88. Because the significance is 0.05 and the degrees of freedom of this data is 17 (n-1=18-1=17), and also because this test is a two tails hypothesis test, we divided the significance by 2 got 0.025 which lead us to conclude the equals to 2.11. Since the sample t is 8.88 which is much bigger than the 2.11 so the sample t is located in the rejecting area. After the hypothesis test, we concluded that we need to reject H ₀ , and accept H ₁ , which means that there are some significant changes in the data and the data was reasonably reliable. Then as the question instructs, we used the test for the percentage change in interest rates. We used the same T-test equation, applied mean of the percentage change in interest rate, which is 97.19. And then we used µ equals to 0, and the sample standard deviation S equals to 251.75. The n is 18. We found the sample t is 1.64. Since the is 2.11, we concluded that we need to accept the H ₀ , which means that there are some significant errors or other factors that affected the data, so the data is not able to provide a powerful prediction of interest rate for the entire population. As we observed in question 1 a, Japan and Mexico might be in some unusual conditions and had some other factors during those two years that affected them and lead them to have abnormal data values. But we still need further analysis to decide whether we can use the sample of interest rate as a reliable sample to make predication for future investment.

Question 2. A As following the instructions in the question, we wanted to make sure there is a relationship between the two variables of the percent change in market indices and the percent change in interest rates for the eighteen countries, our team decided to create the scatter plot for those two variables. Since the mean task of this case is to predict the change in market indices by analyzing the change in interest rates, so we used the change in interest rates as the explanatory variable, x, which is also referred as the predictor variable, and then we set up the change in market indices as the response variable, which is the variable can be explained by the value of the explanatory variable. After we created the scatter, we found the negative relation between those two variables, which is the linear correlation coefficient, it equals to -0.52. But we noticed an unusual observation is in this data, the representing spot Japan is far away from other spots, and it does not fit the overall pattern of the data, which means that Japan could be an outlier in this data analysis. So we ran an outlier test which is mean ± 3×standared deviation. By doing so, we found the percent market change of Japan in 2005 and 2006 is bigger than mean + 3×standared deviation, it means that the data of Japan is significantly different from the overall pattern. And as we predicated before that Mexico could be one outlier too, and then we ran the outlier test again, found that Mexico’s data is within one standard deviation of the mean, so we concluded that Mexico is not an outlier. Because the data value of an outlier might affect the entire predication, so our team decided to make a scatter without Japan, in case of predicating the future investment strategy, and then mislead our clients to make unprofitable investments. And then we found the correlation coefficient of the data without Japan is -0.35. Because the two correlation coefficients are all negative, we made a reasonable conclusion indicating there is a reasonable negative relation between the change in market indices and the change in interest rates. Our interpretation of this negative relation is the rise in interest rates is usually associated with a decrease in the price of stock value. According to the Gateway text book, “The future expected profits must be discounted by the existing interest. If interest rates rise, the present value of a future expected earning is smaller. A rise in interest rates is therefore often associated with a fall in stock price.” And also, “if the interest rate that a firm must pay to borrow is increased, and nothing else effecting future profits has changed, the higher cost of borrowing may lower expected future returned. Lower expected returns would also lower the stock price today.” (229), so our team suggests those business and individuals who invest in international market by buying and selling stocks, do not buy other countries’ stocks when they have a rise in interest rate, which may led the countries to have a fall in stock prices. <span style="font-family: 'Times New Roman','serif'; font-size: 12pt; line-height: 200%;">Question 2. b <span style="font-family: 'Times New Roman','serif'; font-size: 12pt; line-height: 200%;">In order to analysis the two variables of the changes in market indices and interest rates of 2005 and 2006 we used Excel to conduct a regression analysis of those two variables. For our team want to predict the market indices, so we used the data from all eighteen countries, and set the change in stock market rate be the dependent variable, which is also called response variable, y. And then we set the percent change in interest rate be the independent variable, which is also called explanatory variable, x. And we also used the scatter that we created in question 1 to find the least-squares regression line, which is y = -0.029x + 33.39. After running the regression analysis, we found the coefficient of determination of those two variables is 0.268, which means that 26.8% of the variance in distance is explained by the least-squares regression line, and the rest 73.2% variation in distance is explained by other factors, which means that we cannot use interest rate to predict the 73.2% variation change of the stock market price change. Then we found the regression coefficient is -0.029 which is the slope of the least-squares regression line of those two variables. And our team’s interpretation of the coefficient of determination is that there is a negative relation between the change in market price indices and the change in interest rate. This interpretation matches the interpretation that we did in question 2, a, about the correlation coefficients of those two variables which is that they have negative relation. So after this interpretation of regression coefficient we have more confidence on the prediction of the negative relation between those two variables. <span style="font-family: 'Times New Roman','serif'; font-size: 12pt; line-height: 200%;">We also took a serious analysis on the p-value, because the p-value tells you whether you should reject the null hypothesis. In this case the null hypothesis is mean equals to zero, which means that there is no correlation between sample data and population data. The mean of percent changes in market indices and in interest rate in the year of 2005 and 2006, which are 30.48 and 97.19. The formulae of T-test (need more) <span style="font-family: 'Times New Roman','serif'; font-size: 12pt; line-height: 200%;">However, before making the prediction, our team has to determine statistically whether this model is useful for prediction purposes, and whether those two variables have a strong enough relation to let us make the predication. So our team had to make sure the regression coefficient is a significantly different from zero. Because if the slope is zero, meaning that there is no relation between two variables, so our team found the slopes of data is -0.029, which is very close to zero, but there is still a relation between those two variables.

__**Ethical Considerations**__ International Investments, Inc. used statistical analyses and macro economic concepts to determine the best method for globally investing. One of the most essential components of a business should be taken into account as well though: ethics. There are multiple theories regarding ethics and ethical decision making. We have looked at each theory extensively and found that one of them would best suit International Investments, Inc. in making its decision. The Utilitarian theory fits most understandably: the greatest good for the greatest number of people (Coursepack). It would be in every employee’s best interest to globally invest. At International Investments, Inc. there are skeptical employees. Some employees believe that interest and unemployment rates are acceptable indicators for other countries’ performance within its stock market. Other employees are content basing their choices on who to invest with on actual performance of other individual firms (Case, p. 229). Whichever strategies employees have, our findings will prove that globally investing is beneficial to everyone at International Investments, Inc. The Utilitarian theory should remind your firm that what is most beneficial to a business is what is most beneficial to those within that business. Because there are many ways to find a country’s stock market performance, it is best to implement the procedure that provides results with the most assurance, such as using per capita gross national income. If there is still skepticism or uncertainty, stakeholder impact analysis provides frameworks that may guide International Investments, Inc. in choosing the best method. Of the three frameworks, Pastin’s Approach was most helpful in solving the issues within International Investments, Inc., which were previously addressed. Pastin’s Approach asks that the following four elements be considered when a business decision is being made: 1) Ground rule ethics 2) End-point ethics 3) Rule ethics, and lastly, 4) Social contract ethics. (coursepack p.100) Ground rule ethics asks that a business considers its own values and ground rules when evaluating a new decision. End-point ethics asks that the net benefit of the decision, if it is approved, be considered. Rule ethics recommends that businesses carefully consider stake holders’ rights. Applying the element of rule ethics assures the business that stakeholders’ rights are not infringed upon. The last element, social contract ethics, makes sure each business evaluates and assures everyone’s rights in the decision making process. Applying Pastin’s Approach has helped with making a decision for International Investments, Inc. Applying the first element was a positive determinant for globally investing. The values of International Investments, Inc. are not sacrificed for this procedure. International Investments, Inc. would benefit most if it invested in a country that has similar values and ethics. Investing in a country that provides poor working conditions, no wages at all, or has been known to defraud, may not be the best choice. Looking at the second element, we found that there is a substantial net benefit to investing globally. Globally investing provides diversity in a business’ portfolio (textbook). And one might ask, “Is globally investing at the expense of our own country?” Globally investing is beneficial to all: the country being invested in, the firms investing in that country, and the country itself that is doing the investing will not be negatively effected. The stake holders in the company have rights, and applying rule ethics checks to make sure that stake holder rights are protected. Stake holder rights will not be taken advantage of, nor will they be infringed upon at all if your firm globally invests. Not only will the rights of stake holders be there, the rights of everyone involved in globally investing will be protected. In applying social contract ethics we discovered that everyone, including stake holders in your firm, will benefit. Investing abroad may be a simple decision when looking at analyses and macro economic variables, but ethically making this decision provides greater assurance than numbers.