The probability distributions of the two returns are

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Unformatted text preview: ity distributions of the two returns are given below. a P(X = a) -5% 0.3 3% 0.4 b P(Y = b) -3% 0.4 8% 0.3 5% 0.6 Assume that X and Y are independent. In other words, the two events ‘X=a’ and ‘Y=b’ are independent for all a and b. ht tp :// ih om e. us t.h k/ ~c s_ gx x/ (a) Find E(X) and Var(X), the expected value and variance of the return for fund A. (b) What is P(X = -5%, Y = 5%)? (c) Calculate the probability that the sum of the two returns is equal to zero, that is, P(X + Y = 0). (d) Suppose the investor is interested in putting half of his money in both fund A and fund B. In this regard, the portfolio return Z = 0.5X + 0.5Y is of interest. Find the probability distribution of Z. (e) Find E(Z) and Var(Z). (f) Which investment, fund A or the portfolio, you will advise the employee to choose?...
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This note was uploaded on 02/27/2010 for the course ISOM ISOM111 taught by Professor Anthonychan during the Spring '09 term at HKUST.

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