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Week 5 Lecture Notes.pdf

Week 5 Lecture Notes.pdf - Econ 102A Statistical Methods...

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Econ 102A Statistical Methods for Social Scientists Week 5 Lecture: Applications of Class Concepts The first lecture of Week 5 will be devoted to examples which apply the class concepts discussed to date. Hopefully, these examples will give an introduction to how probabilistic concepts can be used in real-world practice. The examples discussed will be: 1. Binomial Options Pricing Revisited (Please see Handout #34 from the Week 4 Lecture Notes.) 2. Yahoo! Finance Exercise The following multiple choice question appeared on the Yahoo! Finance website (July 25, 2003) and is discussed in John Allen Paulos’ book, A Mathematician Plays the Stock Market: 1 A person puts $10,000 into a weekly trading strategy. Each week there is a 50% chance the person will make an 80% return and a 50% chance he or she will suffer a 60% loss. One year later how much money is the person most likely to have? (a) $1.95 (b) $14,000 (c) $140,000 (d) $1,400,000 (e) $131,000,000 3. Birthday Exercise from First-Lecture Quiz (time most likely will not permit this example) (Admittedly not meant as a ‘real -
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