appendixb_s - APPENDIX B SOLUTIONS TO PROBLEMS B.1 Before...

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APPENDIX B SOLUTIONS TO PROBLEMS B.1 Before the student takes the SAT exam, we do not know – nor can we predict with certainty – what the score will be. The actual score depends on numerous factors, many of which we cannot even list, let alone know ahead of time. (The student’s innate ability, how the student feels on exam day, and which particular questions were asked, are just a few.) The eventual SAT score clearly satisfies the requirements of a random variable. B.3 (i) Let Y it be the binary variable equal to one if fund i outperforms the market in year t . By assumption, P( Y it = 1) = .5 (a 50-50 chance of outperforming the market for each fund in each year). Now, for any fund, we are also assuming that performance relative to the market is independent across years. But then the probability that fund i outperforms the market in all 10 years, P( Y i 1 = 1, Y i 2 = 1, , Y i ,10 = 1), is just the product of the probabilities: P( Y i 1 = 1) P(Y i2 = 1) P( Y i ,10 = 1) = (.5)
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This note was uploaded on 05/03/2009 for the course ECON 418 taught by Professor Breman during the Spring '08 term at University of Arizona- Tucson.

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