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PRESENTATION 4
Question 1
exercise 3.4
Love to Excel
An absolute can only be given in an intuition, while all the rest has to do with
analysis. Henri Bergson
Question 1
(a) Let X be defined as the duration a companys air pump will last
X~N(61000,9000^2)
Question states that if pumps fails before vehicle has travelled 50,000 miles,
it will be required at no cost.
P(X<5000)= 0.1108 or 11.08%
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Question 1
(b) Let X be defined as the duration a companys air pump will last
X~N(61000,9000^2)
P(X=50,000)
= 0.00210%
However, answer should be 0 as you cannot find the probability distribution
at a point.
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Question 1
(c) Let X be defined as the duration a companys air pump will last
X~N(61000,9000^2)
P(42000<X<570000)
=P(X<57000) - P(X<42000)
= 0.310979262 or 31.10%
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Question 1
(d) Let X be defined as the duration a companys air pump will last
X~N(61000,9000^2)
For P=0.8,
= NORMINV (0.8,61000,9000)
= 68574.5911
= 68575 miles
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Q&A
thanks for listening!
Love to Excel
Don't strive to be perfect. Strive for excellence.
Victoria Principal
Love to Excel
PRESENTATION 4
Question 2
exercise 3.9
Love to Excel
An absolute can only be given in an intuition, while all the rest has to do with
analysis. Henri Bergson
Question 2
a)
X~N(11,13^2)
Y~N(10,12^2)
P(X>11)
= 1-P(X<11)
= 0.5
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Question 2
b) Let X be defined as the percentage increase in Dow Jones.
Let Y be defined as the percentage increase in the S&P 500
X~N(11,13^2)
Y~N(10,12^2)
P(X<11)
= 0.04529
= 0.0453
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Question 2
c)
X~N(11,13^2)
Y~N(10,12^2)
P(Y<15)
= 0.6615
= 0.662
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Question 2
d) E(0.3X+0.7Y)
= 0.3(11) + 0.7(10)
= 10.3
Var(0.3X+0.7Y)
=0.3^2VarX + 0.7^2VarY + 2(0.3)(0.7) xy(0.43)
= 113.9436
Std Dev: 10.674
= 10.67
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Question 2
e) E(X-Y)
= 11-10
=1
Var(X-Y)
=1^2*13^2 + (-1)^2*12^2 + 2(1)(-1)*13*12*0.43
= 178.84
Std Dev: 13.373
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Question 2
e) P(X>Y)
= P(X-Y>0)
= 1 P(X-Y<0)
= 0.5298
= 0.530
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Q&A
thanks for listening!
Love to Excel
Don't strive to be perfect. Strive for excellence.
Victoria Principal
Love to Excel
PRESENTATION 4
Question 3
exercise 3.13
Love to Excel
An absolute can only be given in an intuition, while all the rest has to do with
analysis. Henri Bergson
Question 3
Company
Avco
Boscom
Caltrans
8.00%
11.00%
17.00%
Portfolio
Explorer Fund
Integrity Fund
% in Avco Inc
70%
34%
0.50%
6.00%
20.00%
% in Boscom Inc
15%
33%
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% in Caltrans Inc
15%
33%
Question 3
Expected Return (Explorer)
= 0.7*0.08 + 0.15*0.11 + 0.15*0.17
= 9.8
Expected Return (Integrity)
= 0.34*0.08 + 0.33*0.11 + 0.33*0.17
= 11.96
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Question 3
(A + B) = A + 2AB + B
Var(A + B) = Var(A) + 2 Cov (A,B) + Var(B)
Hence:
Var(A + B + C) = Var(A) + Var(B) + Var(C) + 2 Cov (A,B) + 2 Cov
(A,C) + 2 Cov (B,C)
As annual returns are mutually independent, Cov (A,B) = 0 and Cov (B,C)
=0
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Question 3
Var_Explorer(A+B+C)
= 0.7^2*0.5^2+0.15^2*6^2+0.15^2*20^2
= 9.9325
Std Dev= 3.1515
X~N(9.9325,3.1515^2)
P(X>0)
= 1- P(X<0)
= 0.9990631
= 99.91% (Positive, In the black)
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Question 3
Var_Integrity(A+B+C)
= 0.7^2*0.5^2+0.15^2*6^2+0.15^2*20^2
= 47.5093
Std Dev= 6.892699
X~N(47.5093,6.892699^2)
P(X>0)
= 1- P(X<0)
= 0.9586446
= 95.86% (Positive, In the black)
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Q&A
thanks for listening!
Love to Excel
Don't strive to be perfect. Strive for excellence.
Victoria Principal
Love to Excel
PRESENTATION 4
Question 4
exercise 3.16
Love to Excel
An absolute can only be given in an intuition, while all the rest has to do with
analysis. Henri Bergson
Question 4
p values
Condition
Minimum n value
0.5
n 10 and n 5.26
10
0.1
n 50 and n 5.56
50
0.01
500
0.001
5000
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Question 4
Let X be a binomial distribution with probability of success 0.01, and 20
attempts.
p = 0.01, n = 20
X~Binom(20,0.01)
P(X 0)
= 0.817906938
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Question 4
Approximating Binomial to Normal
= 0.2, = 0.444972
Let X be a normal distribution with mean 0.2 and standard deviation of
0.445.
X~N(0.2,0.445)
P(X 0)
= 0.810418358
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Q&A
thanks for listening!
Love to Excel
Don't strive to be perfect. Strive for excellence.
Victoria Principal
Love to Excel
PRESENTATION 4
Question 5
parts I & II
Love to Excel
An absolute can only be given in an intuition, while all the rest has to do with
analysis. Henri Bergson
Question 5
I) Let X be the number of hours at which the device fails at.
X ~ Exponential (0.02)
=
0.02
E(X) =
50
P(X 25) =
P(X 100) =
0.39346934
0.135335283
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Question 5
II) Let X be the customer service time.
X ~ Exponential (0.360)
=
0.35971223
P(X 2) =
P(X 5) =
P(X 2.78) =
0.512967518
0.1655369
0.367879441
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Q&A
thanks for listening!
Love to Excel
Don't strive to be perfect. Strive for excellence.
Victoria Principal