SCHOOL OF FINANCE AND APPLIED STATISTICS

QUANTITATIVE RESEARCH METHODS (STAT1008)

Tutorial Week 5

Question 1

(a)
(i ) E ( X ) = 0 4 300 + 0 6 500 = 420.
(ii) E (Y ) = 0 25 200 + 0 75 100 = 125.

( iii ) var ( X ) = E (( X ) ) = ( x ) p ( x )
2 2
i

= ( 300 420 ) 0 4 + ( 500 420 ) 0 6

2 2

= 5760 + 3840
= 9, 600

( iv ) var (Y ) = E (Y 2 ) E (Y )
2

= y 2 p(y) E (Y )
2

= ( 2002 0 25 + 1002 0 75 ) (125 )

2

= 17,500 15, 625

= 1,875
( v) E ( X + Y ) = E ( X ) + E (Y )
= 420 + 125
= 545

(vi) var( X + Y ) = var ( X ) + var (Y ) ( assuming X and Y are independent )

= 9, 600 + 1,875
= 11, 475

( vii ) E ( 3 X ) = 3E ( X ) = 3 420 = 1260

( viii ) E ( 3 X + 2Y ) = E ( 3 X ) + E ( 2Y ) = 3E ( X ) + 2 E (Y ) = 3 420 + 2 125 = 1510
( ix ) var ( 3 X ) = 9 var ( X ) = 9 9600 = 86, 400
(x) var ( 3 X + 2Y ) = var ( 3 X ) + var ( 24 ) = 9 var( X ) + 4 var ( Y ) = 9 9600 + 4 1875 = 93,900

Question 2
 Let profits of selling soft drink be SD and profits for selling ice cream be IC (in
dollars).

Weather Probability SD profits IC profits

Cold 0 40 50 30

Warm 0 60 60 90
(i ) E ( SD ) = 0 4 50 + 0 6 60 = $56.
var ( SD ) = E ( SD 2 ) ( E ( SD ) )
2

= 0 4 502 + 0 6 602 ( 56 )
2

= 3160 3136
= ( $ ) 24
2

S ( SD) = 24 = $4 90 (to nearst cent)

( ii ) E ( IC ) = 0 4 30 + 0 6 90 = $66

(
var ( IC ) = E ( IC ,c )
2
)
= 0 4 ( 30 66 ) + 0 6 ( 90 66 )
2 2

= 518 4 + 345 6
= ( $ ) 864
2

S ( IC ) = 864 = $29 39 (to nearst cent)

( iii ) covar( SD, IC ) = E ( ( X X )(Y Y ) )

= 0 4 ( 50 56 ) ( 30 66 ) + 0 6 ( 60 56 ) ( 90 66 )
= 86.4 + 57.6
= 144 ( $ ) .
2

(iv) The answer will depend on the vendors attitude to risk. While selling ice cream
gives a higher expected profit, it also has a much higher risk as shown though the
much larger (approx 6 times larger) standard derviation. Thus, if risk averse, the
vendor may choose to sell soft drink as while the expected profit is lower, the risk is
also much lower.

(v) The covariance between soft drink and ice cream sales is positive indicating a
positive relationship. That is, on a warm day, profits from soft drinks are higher
and profits from ice cream are also higher (than on a cool day).

Question 3
 Let purchasing only fuel be F. Thus, purchasing anything else is F .
Let paying with credit card be C. Thus, paying any other way is C .

We are given that P ( F ) = 0 70

P ( C ) = 0 50
P ( C / F ) = 0 65

(i) Want to find P (C F ).

Know that P (C / F ) = P (C F ) / P ( F )
P ( C F ) = P ( C / F ) P ( F )
= 0 65 0 70
= 0 455

(ii) Want to find (

P CF )
Know that P ( F ) = P (C F ) + P C F( ) (i.e. people who purchase only fuel
either pay by credit card or some other means)
( )
P C F = P ( F ) P (C F )
= 0 7 0 455
= 0 245

(iii) Want to find (

P CF )
Know that P (C ) = P (C F ) + P (C F ) (i.e people who pay by credit card
either purchase only fuel or not only fuel)
( )
P C F = P (C ) P (C F )
= 0 5 0 455
= 0 045

(iv) For independence, P ( A B ) = P ( A) P ( B )

In this case P ( C F ) = 0 455 P ( C ) P ( F ) = 0 7 0 5 = 0 35
Payment type and purchase type are not independent.

Question 4
Let overdue account be OD. Not overdue is OD .
Let balance <$250 be LESS. Balance $250 is LESS .

(i)
event OD OD
 probability 0 46 0 54

(ii)
event LESS LESS
probability 0 43 0 57

(iii) Want to find ( ) (

P LESS | OD = P LESS OD / P ( OD ) )
= 0 34 / 0 46
= 0 739 ( to 3dp )

(
P OD LESS )
(iv) Want to find (
P OD | LESS = )
( P(LESS)
0.34
=
0.57
= 0.596 to 3 decimal places.

(v) If independent P ( A B ) = P ( A) P ( B )
Here P ( LESS OD ) = 0 12 P ( LESS) P ( OD ) = 0 43 0 46 = 0 198 ( to 3dp )
Account balance and account status are not independent variables.

Question 5
A student majoring in accounting is trying to decide on the number of firms to which he
should apply for employment. Given his work experience and grades he estimates he has a
60% chance of getting an offer from each firm to which he applies. He decides to apply to
only 4 firms. What is the probability that he has no job offers? (Assume firms act
independently, and his estimation is accurate.) How many firms should he apply to if he
wants to have at least 99% chance of receiving at least one offer?

Let X be the number of offers he gets. X~Bin (n=4, p=0.6)

P(X=0) = 0.0256 from tables.

Let Y be the number of offers he gets from m applications

Y~Bin(m, 0.6)
Want P(Y1) 0.99, that is P(Y=0)<0.01

From tables, P(Y=0) = 0.0041 when m=6, so he must apply to at least 6 firms to have a
99% chance of receiving at least one offer.

Further exercises:
25 (a) P(does not enjoy clothes shopping | female) = 267/543 = 0.4917
(b) P(male | enjoys clothes shopping) = 238/514 = 0.4630
 (c) Since P(male | enjoys clothes shopping) = 0.4630 and P(male) = 542/1085 or
0.4995, the two events are not statistically independent.

26 (a) P(needs warranty repair | manufacturer based in U.S.) = 0.025/0.6 = 0.0417

(b) P(needs warranty repair | manufacturer not based in U.S.) = 0.015/0.4
= 0.0375
(c) Since P(needs warranty repair | manufacturer based in U.S.) = 0.0417 and P(needs
warranty repair) = 0.04, the two events are not statistically independent.
7 PHStat output:
Probabilities & Outcomes: P X Y
0.1 -50 -100
0.3 20 50
0.4 100 130
0.2 150 200

Statistics
E(X) 71
E(Y) 97
Variance(X) 3829
Standard Deviation(X) 61.87891
Variance(Y) 7101
Standard Deviation(Y) 84.26743
Covariance(XY) 5113
Variance(X+Y) 21156
Standard Deviation(X+Y) 145.451
(a) E(X) = $71 E(Y) = $97
(b) X = 61.88 Y = 84.27

(c) Stock Y gives the investor a higher expected return than stock X, but also has a
higher standard deviation. Risk-averse investors would invest in stock X, whereas
risk takers would invest in stock Y.
8 (a) PHStat output:

Let X = corporate bond fund, Y = common stock fund.

(a) E(X) = $66.2 E(Y) = $63.01.
(b) X = $57.2150 Y = $195.2172
(c) CV ( X ) = 86.43% CV (Y ) = 309.82%
The corporate bond fund gives the investor a slightly higher expected return than the
common stock fund, and has a standard deviation about 1/3 of that of the common
stock fund. An investor who does not like risk but desires a high expected return
should invest in the corporate bond fund.
(d) According to the probability of 0.01, it is highly unlikely that you will lose $999 of
every $1,000 invested.

11 Given = 0.5 and n = 5, P(X = 5) = 0.0312.

12 Partial PHStat output:

Binomial Probabilities

Data
Sample size 6
Probability of an event of interest 0.825

Statistics
Mean 4.95
Variance 0.86625
Standard deviation 0.930726
Binomial Probabilities Table
X P(X) P(<=X) P(<X) P(>X) P(>=X)
0 2.87E-05 2.87E-05 0 0.999971 1
1 0.000812 0.000841 2.87E-05 0.999159 0.999971
2 0.009575 0.010416 0.000841 0.989584 0.999159
3 0.060187 0.070604 0.010416 0.929396 0.989584
4 0.212806 0.28341 0.070604 0.71659 0.929396
5 0.401291 0.6847 0.28341 0.3153 0.71659
6 0.3153 1 0.6847 0 0.3153
Let X = number of on-time flights.
(a) P(X = 4) = 0.2128.
(b) P(X = 6) = 0.3153
(c) P(X > 5) = 0.9294
(d) E(X) = 4.95 X = 0.9307
(e) The four assumptions are (i) the sample consists of a fixed number of observations,
n, (ii) each observation can be classified into one of two mutually exclusive and
collectively exhaustive categories, usually called an event of interest and not an
event of interest, (iii) the probability of an observation being classified as an
event of interest, , is constant from observation to observation and (iv) the
outcome (i.e., an event of interest or not an event of interest) of any
observation is independent of the outcome of any other observation.