ECON1203

Business and Economics Statistics

Tutorial 5 Problem
Week 6
1. A believer in the random walk theory of stock markets thinks that an index of stock
prices has a probability of 0.65 of increasing in any one year. Let X be the number of
years among the next 5 years in which the index rises.
(a) What do we need to assume for X to have a binomial distribution. What are n and p?
What are the possible values that X can take?
(b) Assuming X has a binomial distribution, construct the probability distribution of X
and draw the associated probability histogram.
(c) What are the mean and variance of X?
(d) Let Y be the number of years in which the index falls. Assuming X is binomial is Y
binomial? What are the mean and standard deviation of Y?
2. Work through problem 47 on page 234 of Sharpe (Chapter 6).

3. Work through problem 55 on page 235 of Sharpe (Chapter 6).

4. A random number generator is designed to draw numbers at random from within a

specified range. We can consider any number in the range as a possible outcome.
(a) What type of distribution is the random number generator drawing from?
(b) Suppose we program a random number generator to generate a random number with a
value falling in the interval [0, 2]. What is the height of the density of the distribution
from which the random number generator is drawing? Draw a graph of the probability
density function.
(c) What is the cumulative probability distribution of the random variable from which
draws are being taken? Draw a graph of the cumulative probability distribution
function.
(d) Find the following for this case: P(Y<0.8); P(Y0.8); P(0.5<Y<1.5), using both the
density function and the cumulative probability function. Show that your answers
match whichever you use.
5. From several years records, a fish market manager has determined that the weight of
deep sea bream sold in the market (X) is approximately normally distributed with a mean
of 420 grams and a standard deviation of 80 grams. Assuming this distribution will
remain unchanged in the future, calculate the expected proportions of deep sea bream sold
over the next year weighing
a) no more than one standard deviation above the mean.
b) between 340 and 580 grams.
c) more than 260 grams.
6.

Work through problem 7 on page 262 of Sharpe (Chapter 7).