Quantitative Methods in Finance

Correlation & Regression

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Assignment Specification
The attached dataset [entitled Excel Raw Dataset] which is available to download
on Moodle reports on a sample of homes sold in the Dublin area during 2008.
There are five separate suburbs considered which have been made anonymous
using the numbers (1-5)

Part 1 [35 marks]

[2000 words approx]

a)

Using relevant academic literature, provide a detailed account of the

following probability topics.

(i)

Rules of Probability.

(ii)
Normal Distribution and its application.
(15 marks)
b)

Construct two separate probability distributions for any variable(s) of your

choice from the data set and comment on the characteristics of the
distribution.
(20 marks)

Part 2 [15 marks]

a)

b)

Calculate the mean and standard deviation of home selling prices to the
nearest whole number. Interpret your results.
[5 marks]
Assuming a normal distribution for the price of houses in the dataset
provided and using the relevant measure of central tendency and
dispersion, calculate the percentage of homes which sold for:
i.
greater than 230,000
ii.
less than 220,000
iii.
between 221,000 and 222,000
iv.
between 231,000 and 232,000
Describe and interpret each of your results fully.
[10 marks]

Part 3 [10 marks]

An investment management company has estimated that five per cent of all
traders leave the company after bonuses are announced each year. It is assumed
that the decision to exit for each trader is independent. A sample of ten traders
is chosen at random from the firms HR personnel information. You have been
tasked with addressing the following questions based on the information
provided
a)

What is the probability that five traders will leave the company next year?
(2 marks)

b)

c)

What is the probability that four or less traders will leave the company
next year
(3
marks)
Explain what probability distribution you adopted for use with this scenario
and why it is appropriate in this context.
(5 marks)

Part 4 [10 marks]

Suppose the prospects for recovering principal for a defaulted bond issue
depends on which of two economic scenarios prevails. Scenario 1 has a
probability of .75. It will result in recovery of 0.90 per 1 with probability .45 or
in recovery of .80 per 1 with probability .55. Scenario 2 has a probability of .25
and will result in recovery of 0.50 per 1 with probability .85 or in recovery of
0.40 per 1 with probability .15.
a)
Illustrate this information on a probability tree
b)
Compute the expected return given Scenario 1.
c)
Compute the expected return given Scenario 2.
d)
Compute the overall expected return.
Part 5 [30 marks] [750- 1000 words max]
Critically evaluate the use of the Normal distribution in modern finance.

http://smallbusiness.chron.com/normal-distribution-uses-inventory-forecasting37419.html
http://www.netmba.com/statistics/distribution/normal/
https://www.boundless.com/statistics/textbooks/boundless-statisticstextbook/continuous-random-variables-10/the-normal-curve-39/the-normaldistribution-190-2638/
http://yourbusiness.azcentral.com/normal-distribution-uses-inventoryforecasting-27813.html
http://robert-craven.com/the-bell-curve-in-business/
http://moneyterms.co.uk/normal-distribution/
https://empxtrack.com/blog/bell-curve-for-performance-appraisal/
http://www.halogensoftware.com/blog/forced-distribution-of-performance-ratingswhen-normal-is-skewed
http://mathsupport.mas.ncl.ac.uk/wiki/Normal_Distribution_(Business)
https://www.sophia.org/tutorials/practical-applications-of-the-bell-shaped-curve