Assignment 2

Please write your name here ECON 4002

Please submit your answers by 4:00 P.M. on Friday, March 04, 2011 by leaving them in the Drop Box on the door of C876 Loeb. Note that the Drop Box will be emptied at exactly 4:00 P.M. on that date; and that the deadline is rm. 1. Question 1: A business school placement director wants to be estimate the mean annual salaries ve years after students graduate. A random sample of 25 such graduates found a sample mean of $42,740 and a sample standard deviation of $4,780. (a) Derive the formula of the 1 condence interval for the population mean. (b) Find a 90% condence interval for the population mean, assuming that the population distribution is normal. 2. Question 2: Lecture 6 gave the denition of a consistent estimator. It can be shown that, for a random sample of independent and identically distributed random variables, the sample mean will converge to the population mean as the sample size goes to innity. In this exercise, you will conduct a computing experiment to demonstrate the idea of a consistent estimation rule. The steps in the computing experiment are as follows: For the daily closing prices, pretend that your data set represents the complete population so that the mean of the closing prices is the true population mean. Take a random sample of 20 daily closing prices and calculate the sample mean from the 20 observations. It is clear 1

that this sample mean may be smaller or bigger than the true mean. Repeat this experiment for random samples of 40, 60, 80, and 100 daily closing prices. That is, in each repetition of the experiment pick a random sample of 40, 60, 80, and 100 daily closing prices and calculate the sample mean. Since the sample mean is a consistent estimator, one can expect that the sample average should get very close to the true population mean as the sample size is equal to 100. [Hint: Please go to http://finance.yahoo.com/q/cp?s=%5EDJI+Components and download a series of stock price for yourself. Note that a student must choose his/her own stock. For computation, you can use Excel or Shazam.] 3. Question 3: Using the data in Question 3, do the following tasks (a) Compute daily returns, rt = log Pt log Pt1 . From this data set on daily returns, calculate a 95% condence interval estimate for the population mean. For this data set, how does the use of the t-distribution dier from the use of the normal distribution for calculating interval estimates? (b) Test the null hypothesis that the population mean of the daily returns is zero against a two-sided alternative. State the null and alternative hypotheses that you are testing using appropriate notation. Use a 5% signicance level. (c) Construct the condence interval estimate in (a). 4. Question 4: Let X1 , X2 , . . . be i.i.d. with normal distribution N (0.5, 2). Use the CLT to estimate the probability P 4 <
9000 i=1

Xi 10 .

5. Question 5: A random sample X1 , X2 , . . . , Xn is drawn from a population with mean and variance 2 . Two estimator of the population mean are X n and X1 . (a) Show that both estimators are unbiased. (b) Derive the variances of these estimates. Which estimator is more ecient? Why.