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ECO251 QBA1
THIRD HOUR EXAM
Nov 24, 2003
Name: ____KEY_____________
Social Security Number: _____________________
Class Time (Circle) 10am 11am
Part I: (30+ points) Do all the following: All questions are 2 points each except as marked. Exam is normed
on 50 points including take-home. (Showing your work can give partial credit on some problems!)
1.
2.
3.
3 3.5
P x 3 P z
P z 0.50
1
251y0332 11/18/03
4.
If we know that the length of time it takes a college student to find a parking spot in the library
parking lot follows a normal distribution with a mean of 3.5 minutes and a standard deviation of 1
minute, find the probability that a randomly selected college student will take between 2 and 4.5
minutes to find a parking spot in the library parking lot. Make a diagram!
a) 0.0919
b) 0.2255
c) 0.4938
d) *0.7745
Solution: x ~ N 3.5, 1
4. 5 3. 5
2 3.5
z
P 1.50 z 1.00
1
1
Not only is this almost identical to Grass2. The probabilities for x are still the same
as on the last exam! Why are so many of you still trying to compute sample means and variances
when there is no sample here?
TABLE 5-4
and
.10
.20
.25
.20
.15
.05
.05
Total
.10
.20
.45
.15
.05
.05
x
0 1
0 .10 .20
y
6 0 0
P x .10 .20
xP x 0 .20
2
x P x 0 0.20
2
.25
.20
.45
.90
1.80
3
0
.15
.15
.45
1.35
4
0
.05
.05
.20
0.80
5
0
.05
.05
.25
1.25
P y yP y y P
.55
0
0
.45 2.70 16.20
1.00 2.70 16.20
2.00
5.40
2
251y0332 11/18/03
P x 1 , x E x xP x 2.00 ,
E x x P x 5.40
P y 1 , y E y yP y 2.70 and
To summarize
E y2
P y 16.20
E xy
xyP xy
.10 0 0
0 0 6
0 0
0 0
.201 0
01 6
0
2.4
.25 2 0
.20 2 6
0
2.7
0
1 .2
0 3 0
.15 3 6
0 4 0
.05 4 6
0 5 0
.05 5 6
0
7.8
1.5
2
y
E y
xy
x
xy
x y
2
y
2.400
1.40 8.91
1.40 1.1832,
2.400 2
1.40 8.91
.46176 .6795 .
is ________.
and y is ________.
compute the probability of receiving at least 10 e-mails on such a day, he will use what type of
probability distribution?
a) binomial distribution.
b) *Poisson distribution.
c) hypergeometric distribution.
d) none of the above.
251y0332 11/18/03
13. A multiple-choice test has 30 questions. There are 4 choices for each question. A student who has
not studied for the test decides to answer all questions randomly. What type of probability
distribution can be used to figure out his chance of getting at least 20 questions right?
a) *binomial distribution.
b) Poisson distribution.
c) hypergeometric distribution.
d) none of the above.
14. The number of 911 calls in Butte, Montana, has a Poisson distribution with a mean of 10 calls a
day. The probability of between six and nine 911 calls in a day is ____________.
Solution: P 6 x 9 P x 9 P x 5 .45793 .06709 .3908
15. A debate team of 4 members for a high school will be chosen randomly from a potential group of
15 students. Two thirds of the 15 students have no prior competition experience while the others
have some degree of experience. What is the probability that exactly half of the members chosen
for the team have some prior competition experience?
Solution: Hypergeometric distribution. N 15, n 4, M Np 1 3 15 5,
P 2
C 25 C 210
C 415
5! 10!
5 4 10 9
3! 2! 8! 2!
5 10 9
2 1 2 1
.3297
15!
15 14 13 12 15 7 13
11! 4!
4 3 2 1
16. The on-line access computer service industry is growing at an extraordinary rate. Current
estimates suggest that only 20% of the home-based computers have access to on-line services.
This number is expected to grow quickly over the next 5 years. Suppose people with home-based
computers were randomly and independently sampled. Find the probability that the first person
that has access to on-line services is between the 5th and the tenth person sampled.
Solution: Geometric distribution
F c P x c 1 q c , because success at try c or earlier implies that there cannot have
been
failures on the first c tries. q 1 p 1 .2 .8 . P 5 x 10 P x 10 P x 4
17. (Extra Credit)A catalog company that receives the majority of its orders by telephone conducted a
study to determine how long customers were willing to wait on hold before ordering a product.
The length of time was found to be a random variable best approximated by an exponential
distribution with a mean equal to 2.8 minutes. What proportion of callers is put on hold longer
than 2.8 minutes?
a) 0.60810
b) *0.367879
c) 0.50
d) 0.632121
Solution: The mean is
c 1
2.8
1 2.8
c
minutes. F x 1 e cx . Since
1 2.8 ,
c
.3571 calls
1
2.8 1 and
2.8
P x 2.8 1 P x 2.8 1 F 2.8
per minute. If x 2.8, cx
1 (1 e 1 ) e 1 .367879
251y0332 11/18/03
ECO251 QBA1
THIRD EXAM
Nov 24, 2003
TAKE HOME SECTION
Name: _________________________
Social Security Number: _________________________
Throughout this exam show your work! Please indicate clearly what sections of the problem you are
answering and what formulas you are using.
Part II. Do all the Following (20 Points) Show your work!
1. The Lees give the following rates of return for two securities.
Time Period
Security A
Security B
1
.10
-.10
2
-.05
.05
3
.15
.00
4
.05
-.10
5
.00
.10
a) Take the second to last digit in your Social Security Number and use it to replace the zero in the -.10 in
security B returns. For example, Seymour Butzs SS number is 123456789 and he will change -.10 to -.18.
Find the sample mean and standard deviation for Security B. For Security A, the sample mean is 0.05 and
the sample standard deviation is .07906. Use a coefficient of variation to show which seems riskier.(3)
b) Find the sample covariance and correlation between the returns on Security A and Security B. Comment
on the meaning of these results. (3)
c) If we invest 60% of our money in security A and 40% of our money in Security B, what is the mean and
standard deviation of the return? How does the riskiness of this portfolio compare with that of the
component stocks. (2)
d) Assume that the return of security B was 20% higher. So that you could write v 1.2 y , where y is
the original return on security B and v is the new return. Find (the sample mean and) standard deviation
of the new security B and the sample covariance and correlation with security A. Do not multiply the
numbers you were given for security B by 1.2 and recompute your answers you will get no credit! You
can get your answers from the results you already have in a-c). (3)
Solution: This is a sample!
Row
Note that there was no reason to do
y
xy
y2
x
x2
1
0.10
2 -0.05
3
0.15
4
0.05
5
0.00
sum 0.25
0.0100
0.0025
0.0000
0.0100
0.0100
0.0325
2
-0.0100
-0.0025
0.0000
-0.0050
0.0000
-0.0175
0.0375,
y 0.05, y
0.0325, and
0.0175 .
Then x
s x2
-0.10
0.05
0.00
-0.10
0.10
-0.05
x 0.25, x
a) So n 5,
xy
0.0100
0.0025
0.0225
0.0025
0.0000
0.0375
nx
n 1
for you! s 2y
0.0375 5 0.05
4
ny 2
n 1
y 0.05 0.01 .
n
0.00625
sx
0.0325 5 0.01 2
0.00800 s y
4
0.00800 0.0894427 .
251y0332 11/18/03
.0790569
0.0894427
1.581 and for y it is
8.944 .
0.05
0.01
Though it is not completely obvious how to compare negative and positive coefficients of variation, it
should be clear that stock y is riskier.
The coefficient of variation for x is
b) s xy
rxy
s xy
sx sy
5 1
0.00375
0.00625 0.00800
2
rises. rxy .28125 is not very large on a zero
to one scale, indicating that the relationship is relatively weak. Note that 1 rxy 1 always!
Var R
P2 .4 .
P12Var
R1
P22Var
R2 2 P1 P2 Cov R1 , R2 . Let R1 x,
R 2 y , P1 .6 and
2
We know x 0.05 and y 0.01 . s x2 0.00625, s y 0.00800 and s xy 0.00375 .
Since the formulas can be used for sample data as well as expected values,
R .6 0.05 .4 0.01 0.03 0.004 0.026. .
.04159
1.596 , which is comparable
0.026
2
Since s y 0.00800 , s v2 1.2 2 0.00800 0.01152 and s v
0.01152 0.107331 .
251y0332 11/18/03
2. As everyone knows, a jorcillator has two components, a phillinx and a flubberall. It seems that the
jorcillator only works as long as both components work.
The probability of the phillinx failing is given by a continuous uniform distribution with a range between
c 1.5 and d 3.5, so , if x represents the life of the phillinx, the probability of the phillinx failing in
the first year is P 0 x 1 , the probability of it failing in the second year is P 1 x 2 and the
probability of it lasting beyond the 2nd year is P x 2 .
The probability of the flubberall failing is given by a Normal distribution with a mean of 2 and a standard deviation of 0.5, so , if
represents the life of the phillinx, the probability of the phillinx failing in the first year is P 0 y 1 , etc.
Failure of components is assumed to be independent, so that, if the probability of the phillinx failing in the first year is .1 and the
probability of the flubberall failing in the first year is .7, the probability of both components failing in the first year is (.1) (.7) =.07
(This is not necessarily the probability that the jorcillator will fail in the first year!)
a) What is the probability the Phillinx will fail in the first year? The second year? After the second year? (1.5)
b) What is the probability the Flubberall will fail in the first year? The second year? After the second year? (1.5)
c) What is the probability that the jorcillator will fail in the first year? (2)
d) What is the probability that the jorcillator will fail in the second year? (2)
e) What is the probability that the jorcillator will last beyond 2 years? (2)
Solution: a) The probability of the phillinx failing is given by a continuous uniform distribution with a
range between c 1.5 and d 3.5, so , if x represents the life of the phillinx, the probability of the
phillinx failing in the first year is P 0 x 1 , the probability of it failing in the second year is
P 1 x 2 and the probability of it lasting beyond the 2nd year is P x 2 . What is the probability
the Phillinx will fail in the first year? The second year? After the second year?
1
1
1
P 0 x 1 0
(ii)
P 1 x 2
(iii)
2 1.5
.25
3.5 1.5
Event A3 : Shade the part of the box between 2 and 3.5. It has area P A3
3.5 2
.75
3.5 1.5
Note that these probabilities add to one.
b) The probability of the flubberall failing is given by a Normal distribution with a mean of 2 and a
standard deviation of 0.5, so , if y represents the life of the phillinx, the probability of the phillinx failing
in the first year is P 0 y 1 , etc. What is the probability the Flubberall will fail in the first year? The
second year? After the second year? y ~ N 2, 0.5 Name the following events B1 : Flubberall fails in
P x 2
first year; B 2 : Flubberall fails in second year and B3 : Flubberall fails after second year.
(i)
Event B1 : P B1
1 2
02
P 0 y 1 P
z
P 4.00 z 2.00
0.5
0.5
P 4.00 z 0 P 2.00 z 0 .5000 .4772 .0228
10
Event B 2 : P B 2 P 1 y 2
1 2
2 2
z
P 2.00 z 0 .4772
0.5
0.5
(ii)
2 2
P z 0 .5 I warned you!
Event B3 : P B3 P x 2 P z
0.5
11
251y0332 11/18/03
Now, note that whichever component fails first downs the jorcillator. The following nine joint events can be
enumerated.
Joint Event
Probability
Jorcillator fails
In Year 1
0 .0228 0
A1 B1
0 .4772 0
0 .5 0
.25 .0228 .0057
.25 .4772 .1193
.25 .5 .1250
.75 .0228 .0171
.75 .4772 .3579
.75 .5 .3750
A1 B 2
A1 B3
A2 B1
A2 B 2
A2 B3
A3 B1
A3 B 2
A3 B3
In Year 1
In Year 1
In Year 1
In Year 2
In Year 2
In Year 1
In Year 2
After Year 2
If we add together the probabilities of possible joint events, we find the following.
c) Probability of failing in first year = .0057 + .0171 = .0228
e) Probability of it lasting beyond second year = .3750
d) Probability if it failing in second year = 1 - .0228 - .3750 = .1193 + .1250 + .3579 = .6022
Most of you were not thinking! Thinking is what probability is all about. If you told me that the
probability of the jorcillator failing in the first year was 0 .0228 0 , you are saying that it cannot fail
in the first year. But you know that there is a probability of .0228 of the Phillinx failing in the first year, and
the rules say it needs the Phillinx. This is an easier version of PROBLEM H4, which I told you that you
would see again. One way of looking at it is (i) that if both components are needed the probability of failing
in first year = P A1 B1 P A1 P B1 P A1 B1 0 .0228 0 .0228 , the probability
beyond the second yeast both components must last beyond the second year. Then the probability if it
failing in second year = 1 P A1 B1 P A3 B3 1 .228 .3750 because it has to fail
sometime so the probabilities have to add to one. But (Are you ready to try a little more thinking?) (ii) if
the jorcillator will work with only one of the two components the probability of failing in first year =
P A1 B1 , the probability of it lasting beyond second year =
P A3 B3 P A3 P B3 P A3 B3
3. (Extra Credit) A new phillinx has an average life of 1 year and its failure time follows the exponential
distribution.
a) What is the probability that the phillinx will fail in the first month? (2)
b) What is the probability the Phillinx will fail in the first year? The second year? After the second
year? (1.5)
c) If we assume that the Flubberall has the same distribution as in problem 2, what is the
probability of the jorcillator failing in the first year? The second year? After the second year? (3)
Solution: The mean is
1 1
c
year. F x 1 e cx . Since
1 1, c 1 1 .
c
1
12
1
1
1
and the probability that the phillinx will fail in the first month is
, cx 1
12
12
12
1
1
1
F
P x
1 e 12 1 .9200 .0800
12
12
251y0332 12/01/03
a) If x
b) Name the following events B1 : Flubberall fails in first year; B 2 : Flubberall fails in second year and
P B1 P y 1
(ii)
F 1 1 e 1 1 .3679 .6321
P B 2 P1 y 2 F 2 F 1
year is
13