Largest Companies in the US Stocks

By: Taylor and Madison

For our Chapter 8 project, we were assigned data based on ratio of the price of a shared
stock divided by a company’s estimated future earning per share for the largest companies in the
United States (P/E). The number values we have represent the amount of dollars companies are
paying for a one dollar stock. We are using formulas for these equations without knowing
sigma.Our sample size we were given were 51 data values. We found our sample mean by
adding up all of the data values we were given and dividing by 51. We found that our sample
mean was 25.18. This value means that the average P/E ratio for our values was 25.18. This
means that the average companies are paying for a one dollar stock is $25.18. The higher the P/E
ratio indicates stocks that are overpriced and low P/E ratios are considered bargain stocks.
When we calculated our data values in the Google sheet we found our standard deviation.
This means that the amount of variation between our numbers of the P/E ratios was $35.36.
Since we had a higher number than our mean, this means that our values are spread out over a
wider range. We found our degrees of freedom by subtracting our sample size which is 51 from
1. Our degrees of freedom is 50. This number represents the amount of independent values that
can be assigned to our distribution. In simpler terms, how many of our numbers are free to vary
from the sample mean.
We calculated the critical value, which is the number such that the area under the
standard normal curve, by using table 4 in the back of our textbook. To find this value, we had to
take our degrees of freedom and locate it on one side of the table, and at the top of the table we
had to find the correct confidence levels. By using the table, we found that the critical value for a
90% confidence level was 1.676, 95% was 2.009, and finally 99% was 2.678.
Maximal margin of error or E is the amount of random sampling error that can occur
when using results of our data values. It is the percentage points our results can differ from the
actual sample values. We found the maximal margin of error for 90%, 95%, and 99% confidence
levels by finding each of their critical values by finding what our degree of freedom was then
using Table 4 to find critical values for Student’s t Distribution. Then by finding the critical
value we could find the maximal margin of error using the formula E= tc*s/√n with tc being our
critical found using the tables, s being our standard deviation and n being our sample size. We
used this equation for each of the confidence levels, but changing the critical values. For 90%
confidence, the maximal margin of error would be 8.30. We found this by plugging in 1.676
representing tc found by using Table 4 and multiplying that by our standard deviation, which is
35.36/the square root of our sample size which was 51. This number means that the maximal
amount of error that can occur in our data values with 90% confidence is $8.30, this is the
amount that can be above and below where our average is, which is $25.18. The margin of error
with 95% confidence was 9.96. We found this number by replacing tc, which is 2.009 with a
95% confidence level and a degree of freedom of 50. This number means that with 95%
confidence that the max amount of dollars spent on a one dollar stock can be $9.95 above and
below $25.18, which is the average price spent on a one dollar stock. With 99% confidence, we
found the marginal error by using the same formula, but changing the tc value for a 99%
confidence level, which would be 2.678. By using that formula we found the maximal margin of
error to be 13.26. This number means the max amount of money that can be spent on a one dollar
stock can only be $13.26 above or below the average amount of stock spent.
Using our maximal margin of error and the sample mean we could find the confidence
intervals for 90%, 95%, and 99% confidence. By using the formula X -E< μ < X +E. We plug in
the sample mean and each maximal margin of error that we found for each confidence level. For
90% confidence level the equation would look like 25.18-8.30< μ <25.18+8.30. 16.88< μ <33.48
are the intervals we find when solving this problem. This means that the average amount spent
on a one dollar stock with 90% is between $16.88 and $33.48. For a 95% confidence level, we
would plug in 25.18-9.95< μ <25.18+9.95. By calculating this we find the interval to be 15.23< μ
<35.13. These numbers mean that the average amount of money spent on a dollar stock would be
between $15.22 and $35.14 with 95% confidence. As the confidence level increases, the
intervals are further spread apart. For 99% confidence, the intervals would be 25.18-13.26< μ
<25.18+13.26, which is 11.92< μ <38.44. Therefore, with 99% confidence the average amount of
money spent on a dollar stock would be between $11.92 and $38.44.
If we were given σ, which is the population standard deviation, we wouldn’t have needed
to find s. However, our X would have been the same because that is the average of our data
values. We would also wouldn’t have found the degrees of freedom because we would have
known sigma. In addition, we would have used the confidence interval table, rather than the
Student’s t Distribution. The way we found the maximal margin of error would have been the
same but instead of using s we would have used sigma instead. We would be using the
population standard deviation rather than the sample standard deviation.