Question

In: Statistics and Probability

CHAPTER 2-4 Exercise 2.24 In this exercise, we examine the effect of combining investments with positively...

CHAPTER 2-4

Exercise 2.24

In this exercise, we examine the effect of combining investments with positively correlated risks, negatively correlated risks, and uncorrelated risks. A firm is considering a portfolio of assets. The portfolio is comprised of two assets, which we will call ''A" and "B." Let X denote the annual rate of return from asset A in the following year, and let Y denote the annual rate of return from asset B in the following year. Suppose that

E(X) = 0.15 and E(Y) = 0.20,

SD(X) = 0.05 and SD(Y) = 0.06,

and CORR(X, Y) = 0.30.

(a) What is the expected return of investing 50% of the portfolio in asset A and 50% of the portfolio in asset B? What is the standard deviation of this return?

(b) Replace CORR(X, Y) = 0.30 by CORR(X, Y) = 0.60 and answer the questions in part (a). Do the same for CORR(X, Y) = 0.60, 0.30, and 0.0.

(c) (Spreadsheet Exercise). Use a spreadsheet to perform the following analysis. Suppose that the fraction of the portfolio that is invested in asset B is f, and so the fraction of the portfolio that is invested in asset A is (1 f). Letting f vary from f = 0.0 to f = 1.0 in increments of 5% (that is, f = 0.0, 0.05, 0.10, 0.15, . . . ), compute the mean and the standard deviation of the annual rate of return of the portfolio (using the original data for the problem). Notice that the expected return of the portfolio varies (linearly) from 0.15 to 0.20, and the standard deviation of the return varies (non-linearly) from 0.05 to 0.06. Construct a chart plotting the standard deviation as a function of the expected return.

(d) (Spreadsheet Exercise). Perform the same analysis as in part (c) with CORR (X, Y) = 0.30 replaced by CORR(X, Y) = 0.60, 0.0, 0.30, and 0.60.

Exercise 2.38

Ninety percent of residential gas customers in Illinois use gas for residential heating. Sixteen residential gas customers are randomly selected to participate in a panel discussion for a state energy fair. A gas industry executive is hopeful that at least twelve of the panel members, i.e., 75%, will come from homes in which gas is used for residential heating. If you were the executive's assistant, what degree of assurance could you give the executive that her 75% goal might be reached or exceeded?

Solutions

Expert Solution

ANS


Related Solutions

In this exercise, we examine the effect of combining investments with positively correlated risks, negatively correlated...
In this exercise, we examine the effect of combining investments with positively correlated risks, negatively correlated risks, and uncorrelated risks. A firm is considering a portfolio of assets. The portfolio is comprised of two assets, which we will call ''A" and "B." Let X denote the annual rate of return from asset A in the following year, and let Y denote the annual rate of return from asset B in the following year. Suppose that E(X) = 0.15 and E(Y)...
In this exercise, we examine the effect of combining investments with positively correlated risks, negatively correlated...
In this exercise, we examine the effect of combining investments with positively correlated risks, negatively correlated risks, and uncorrelated risks. A firm is considering a portfolio of assets. The portfolio is comprised of two assets, which we will call ''A" and "B." Let X denote the annual rate of return from asset A in the following year, and let Y denote the annual rate of return from asset B in the following year. Suppose that E(X) = 0.15 and E(Y)...
In this exercise, we examine the effect of the margin of error on determining the sample...
In this exercise, we examine the effect of the margin of error on determining the sample size needed. Find the sample size needed to give, with 99% confidence, a margin of error within ±7. Within ±3. Within ±1. Assume that we use σ˜=20 as our estimate of the standard deviation in each case. Round your answers up to the nearest integer. ME=7 : n= ? ME=3 : n= ? ME=1 : n= ?
1. In this exercise, we examine the effect of the value of the estimated standard deviation...
1. In this exercise, we examine the effect of the value of the estimated standard deviation on determining the sample size needed. Find the sample size needed to give, with 90% confidence, a margin of error within ±4, if the estimated standard deviation is σ˜=60. If the estimated standard deviation is σ˜=20. If the estimated standard deviation is σ˜=10. σ˜=60 : n=? σ˜=20 : n= ? σ˜=10 : n=? 2. In this exercise, we examine the effect of the confidence...
Chapter 6, Section 2-CI, Exercise 109 What Influences the Sample Size Needed? In this exercise, we...
Chapter 6, Section 2-CI, Exercise 109 What Influences the Sample Size Needed? In this exercise, we examine the effect of the margin of error on determining the sample size needed. Find the sample size needed to give, with 95% confidence, a margin of error within ±, 8 . Within. ±, 5 Within ±, 1. Assume that we use ά= 25 as our estimate of the standard deviation in each case. Round your answers up to the nearest integer. ME= 8:...
Chapter 6, Section 2-CI, Exercise 111 What Influences the Sample Size Needed? In this exercise, we...
Chapter 6, Section 2-CI, Exercise 111 What Influences the Sample Size Needed? In this exercise, we examine the effect of the value of the estimated standard deviation on determining the sample size needed. Find the sample size needed to give, with 95% confidence, a margin of error within ±5 , if the estimated standard deviation is ά= 50. If the estimated standard deviation is ά=20. If the estimated standard deviation is ά=10. Round your answers up to the nearest integer....
In this exercise, we examine one of the conditions of the Alternating Series Test. Consider the...
In this exercise, we examine one of the conditions of the Alternating Series Test. Consider the alternating series 1−1+1/2−1/4+1/3−1/9+1/4−1/16+⋯, where the terms are selected alternately from the sequences {1/n} and {−1/n^2}. Explain why the nth term of the given series converges to 0 as n goes to infinity. Rewrite the given series by grouping terms in the following manner: (1−1)+(1/2−1/4)+(1/3−1/9)+(1/4−1/16)+⋯. Use this regrouping to determine if the series converges or diverges. Explain why the condition that the sequence {an}{an} decreases...
In this exercise we examine the effects of overbooking in the airline industry. Ontario Gateway Airlines'...
In this exercise we examine the effects of overbooking in the airline industry. Ontario Gateway Airlines' first class cabins have 10 seats in each plane. Ontario's overbooking policy is to sell up to 11 first class tickets, since cancellations and no-shows are always possible (and indeed are quite likely). For a given flight on Ontario Gateway, there were 11 first class tickets sold. Suppose that each of the 11 persons who purchased tickets has a 20% chance of not showing...
afe Rational Fractions In week 4 we completed Chapter 13 Programming Exercise #10 Page 974. Make...
afe Rational Fractions In week 4 we completed Chapter 13 Programming Exercise #10 Page 974. Make sure you have a working fractionType class before starting this assignment. The template requirement from week 4 is not required for this assignment. Your assignment this week is to make your fractionType class safe by using exception handling. Use exceptions so that your program handles the exceptions division by zero and invalid input. An example of invalid input would be entering a fraction such...
Chapter 2 Exercise is divided in to 2 sections A and B. Data for this assignment...
Chapter 2 Exercise is divided in to 2 sections A and B. Data for this assignment is under Data files in module Ex2-30-e8.xls (for A) and Ex2-34-e8.xls (for B). See data under modules. A) The following data give the weekly amounts spent on groceries for a sample of households. $271 $363 $159 $ 76 $227 $337 $295 $319 $250 279 205 279 266 199 177 162 232 303 192 181 321 309 246 278 50 41 335 116 100 151...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT