6603Assignment 1.pdf - MFIN 6603(A&B Assignment 1 Aydede/Dar This assignment is due in class on November 20 It can be answered in groups of 2 or at most

6603Assignment 1.pdf - MFIN 6603(A&B Assignment 1...

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MFIN 6603 (A&B) Aydede/Dar Assignment 1 November 20, 2019 This assignment is due in class on November 20. It can be answered in groups of 2 or at most 3 students. Individual submissions are welcome. Question 1 (12 points) The joint probability distribution of the annual pre-tax labour (work) income Y ($ 000) and annual pre-tax asset income X ($ 000) of adult individuals is as follows: Income from assets (X) Income from work (Y) 4 6 8 10 40 0.01 0.01 0 0 60 0.07 0.15 0 0.07 80 0.03 0.17 0.10 0.08 100 0 0.20 0.10 0.01 a. What are the probabilities that an individual would earn (i) $80 thousand from work and $8 thousand of asset income, and (ii) $40 thousand from work given that he/she earns $6 thousand from assets, and (iii) $10 thousand from assets. (2 points) b. Find means and variances of X and Y. Then find the covariance between them. (4 points ) c. What is the mean and variance of total, pre-tax income S = X +Y. (3 points) d. If the tax rate on asset income is 25% and the tax rate on income from work is 10%, find the mean and variance of after-tax total income. (3 points) Question 2 (10 points) An investor holding a portfolio consisting of two stocks invests 25% of assets in Stock A and 75% into Stock B. The return
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