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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research

An analyst forecasts a company's revenue using a regression: Revenue (in Rs crore) = 200 + 1.5 x (industry volume in lakh units). Industry volume is expected at 400 lakh units, but the analyst's data had a standard error of the estimate of Rs 30 crore. What is the point forecast of revenue, and which range is approximately a 95% prediction interval (point forecast plus or minus 2 standard errors)?

The forecast is 200 plus 1.5 times 400, which equals Rs 800 crore. Two standard errors of Rs 30 crore each equal Rs 60 crore, so the approximate 95% interval is Rs 740 crore to Rs 860 crore. Ignoring the intercept or using one standard error is wrong.

  1. ARs 800 crore; Rs 740 crore to Rs 860 croreCorrect
  2. BRs 600 crore; Rs 540 crore to Rs 660 crore
  3. CRs 800 crore; Rs 770 crore to Rs 830 crore
  4. DRs 860 crore; Rs 800 crore to Rs 920 crore

Explanation

Point forecast = 200 + 1.5 x 400 = 200 + 600 = Rs 800 crore. Two standard errors = Rs 60 crore, so the range is 740 to 860. Omitting the intercept gives 600; using only one standard error gives 770 to 830; adding 60 to the forecast wrongly gives 860.

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