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(c) What is the probability that exactly eight of the twelve visitors are college
students?
(d) What is the expected number of visitors (of the twelve) who are college stu
dents? What is the standard deviation of the number of visitors who are college
students?
3. The website http://MEGA-Retail.com features a huge variety of tness products for
upscale consumers. These consumers are segmented into smartphone consumers
and desktop consumers depending on whether or not the majority of their purchases
are conducted via their smartphones or a less-mobile device such as a desktop or lap
top computer. Indeed, 38% of the MEGA-Retail.coms consumer base are smartphone
consumers, with the remaining 62% being desktop consumers. The Consumer Fraud
Division of the Department of Justice has begun a preliminary investigation into the
online practices of MEGA-Retail.com after a newspaper article exposed complaints
of padded charges. Their rst task is to choose a random sample of 20 customers for
interviews and data collection regarding their transactions with MEGA-Retail.com.
(a) What is the probability that 7 of the 20 randomly chosen consumers will be
smartphone consumers?
(b) What is the probability that between 12 and 14 of the 20 randomly chosen
consumers will be desktop consumers?
(c) What is the probability that 3 or fewer of the randomly chosen consumers will
be desktop consumers?
4. You have made it to the nal round of a game show. The announcer asks you the nal
multiple choice question, which has four possible answers: (a), (b), (c), or (d). If you
answer the question correctly, you win $1,000,000. After listening to the question,
you realize you are not sure of the answer! Rather, you think the answer is either
choice (a) with probability 60%, or choice (b) with probability 40%. You know for
sure the answer is not choices (c) or (d). You have three options at this point:
Choose not to answer the question. In this case, you walk away with $500,000.
Select an answer (either (a) or (b)). If you are correct, you win the $1,000,000.
If you are incorrect, you only win $32,000.
Phone a friend. In this option, the announcer allows you to phone your friend
and ask her/him for help. After listening to your friends response, you then
will need to answer the question. You know that:
2
Given that the correct answer is (a), your friend will say a with probability
80%.
Given that the correct answer is (b), your friend will say b with probability
80%.
(a) What is the probability your friend says the answer is a? Hint: It may help
to make a probability table.
(b) What is the probability that the true answer is b given that your friend says
it is b?
(c) Make a decision tree to nd your best strategy. In words, what should your
strategy be? How much money do you expect to win?
5. A medical test for malaria is subject to some error. Given a person who has malaria,
the probability that the test will fail to reveal the malaria is 0.06. Given a person
who does not have malaria, the test will correctly identify that the person does not
have malaria with probability 0.91.
(a) If someone has malaria, what is the probability that the test will identify that
person as having malaria?
(b) Suppose three unrelated individuals who are not infected with malaria take the
test. What is the probability that at least one of the three individuals will be
identied by the test as having malaria?
(c) In a particular area of a particular country, 20% of the population suers from
malaria. If a random person from this area is tested and his test results indicate
that he has malaria, what is the chance that he actually has malaria?
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4. JoAnne has gathered data on stock prices and rates of return for companies A and B,
and has converted this data into the joint probability distribution of rates of return
for the two companies shown in Table 1.
Probability
(pi )
0.04
0.09
0.16
0.19
0.17
0.15
0.10
0.10
Annual Rate of
Return of Asset A (%)
(xi )
5.1
5.3
7.8
8.2
7.7
9.0
10.7
11.1
Annual Rate of
Return of Asset B (%)
(yi )
6.9
6.1
8.3
9.2
7.9
7.1
9.3
11.4
standard deviation of total daily revenues. Compare the relative risk associated
with revenues from service companies, revenues from home product companies,
and total revenues. What do you observe?
(b) Suppose that revenue to HelpingHomewners from click-thrus is $0.03/click-thru
for service ads and is $0.07/click-thru for product ads. Compute the mean and
standard deviation of total daily revenues. Compare the relative risk associated
with revenues from service companies, revenues from home product companies,
and total revenues. What do you observe?
6. You are tasked with constructing a portfolio out of three assets: A, B and C. The
annual returns, risk, and correlations between the returns on these assets are given in
Table 2. The requirements of the portfolio are: (i) it should be composed of exactly
two assets, (ii) the funds should be invested 50% in each asset, and (iii) the expected
annual return of the portfolio should be at least 10%.
Asset
A
B
C
Annual Expected
Return(%)
13
7
9
Risk
(%)
13
12
15
Correlation
A
B
C
-0.20 -0.15
-0.20
0.30
-0.15 0.30
Table 2: Annual returns, risk, and correlation between the returns of assets A, B, and C.
(a) Find the portfolio that satises all of requirements and has the minimum risk.
(b) [Challenge] Can you nd a portfolio with less risk if you can invest any percentage
in each of the two assets (while still satisfying the minimum 10% expected return
requirement)?
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Company
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
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Beer
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Annual
Sales
($ thousand)
4,800
5,100
5,100
1,900
5,300
2,000
3,400
2,700
2,100
2,600
3,600
2,650
2,200
3,750
2,800
4,600
3,700
4,650
5,900
5,900
4,700
3,800
3,900
4,800
6,050
1,750
5,800
1,600
1,700
1,800
4,200
4,100
6,200
2,400
5,400
2,300
2,500
2,550
6,000
5,500
5,800
6,000
6,100
5,600
5,700
6,250
4,900
5,000
5,100
5,200
Hops
(ounces
per keg)
9.0
9.0
8.0
9.0
8.0
12.0
6.0
8.0
12.0
5.0
10.0
9.0
6.0
12.0
7.0
6.0
8.0
11.0
11.0
12.0
6.0
6.0
12.0
7.0
11.0
13.0
8.0
5.0
10.0
14.0
6.0
6.0
9.0
13.0
17.0
5.0
12.0
12.0
9.0
11.0
8.0
8.0
8.0
6.0
17.0
8.0
5.0
5.0
8.0
8.0
Malt
(pounds
per keg)
8.0
8.0
8.0
7.0
8.0
7.0
7.0
6.0
7.0
6.0
7.0
6.0
7.0
7.0
6.0
8.0
7.0
8.0
8.0
8.0
8.0
7.0
7.0
8.0
8.0
6.0
8.0
6.0
6.0
6.0
7.0
7.0
8.0
7.0
7.0
7.0
7.0
7.0
8.0
7.0
8.0
8.0
8.0
7.0
7.0
8.0
7.0
7.0
7.0
7.0
Annual
Advertising
($)
180,000
180,000
180,000
140,000
180,000
140,000
170,000
180,000
140,000
180,000
170,000
180,000
140,000
170,000
180,000
160,000
170,000
160,000
180,000
180,000
160,000
170,000
170,000
160,000
180,000
150,000
180,000
150,000
150,000
150,000
170,000
170,000
180,000
130,000
190,000
130,000
130,000
130,000
170,000
190,000
170,000
170,000
170,000
190,000
190,000
170,000
170,000
170,000
170,000
170,000
Bitterness
Scale
3
3
3
4
3
5
4
4
5
4
5
5
3
6
5
2
4
4
1
2
2
3
6
3
2
7
4
4
6
7
3
4
3
6
9
4
6
6
2
6
4
3
2
4
9
2
3
2
3
1
Initial
Investment
($ million)
1.4
0.6
0.7
2.4
2.3
1.0
1.5
1.8
0.7
1.3
1.9
0.5
2.1
2.1
2.4
2.0
1.7
0.7
1.6
0.9
1.1
1.1
1.1
2.5
1.7
2.3
0.5
0.8
0.8
0.9
2.4
1.4
2.1
1.4
2.2
1.2
0.9
1.9
1.7
2.2
0.6
2.2
2.1
1.5
1.3
1.2
1.5
1.6
1.4
0.5
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Metal
Aluminum
Copper
Magnesium
0.30
0.30
0.40
0.40
0.10
0.50
0.10
0.25
0.65
0.15
0.40
0.45
35.00
47.00
60.00
140.00
Availability
(tons/month)
600
400
800
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Player
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Average
Rebounds
Per Game
1
2
3
4
5
7
7
4
8
5
10
8
10
9
6
16
11
12
11
9
Average
Assists
Per Game
7
14
12
4
9
6
8
2
2
5
6
8
2
5
3
2
1
5
1
1
Height
(feet and inches)
5' 11"
6' 0"
6' 4"
6' 0"
6' 3"
6' 5"
6' 8"
6' 5"
6' 10"
6' 4"
6' 10"
6' 9"
7' 3"
6' 10"
6' 10"
6' 9"
7' 4"
7' 2"
7' 3"
7' 0"
Average
Points
Per Game
10
14
19
18
20
21
23
13
17
25
20
30
24
15
17
3
27
26
21
14
Defensive Ability
(scale from 0 to 10)
10
9
8
6
8
10
10
5
8
8
9
10
9
7
6
6
9
10
9
8
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Homework 7
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