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FinalProblems1 (1) - Final Practice Problems Econometrics...

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Final Practice Problems - Econometrics 120A 1. Suppose that annual stock market returns are normally distributed with mean 6% and variance 16%. (a) If you invest in stocks, what is the probability that you will see a positive annual return? (b) Alternatively, you can put the money in the bank and obtain a 4% return for sure (with prob- ability 1). What is the probability that you obtain a higher return by investing in stocks than by putting the money in the bank? (c) Historically, there have been a number of important stock market crashes, but no stock market booms of the same magnitude. What does this mean about the skewness of the distribution? Does this agree with the assumption that stock returns are normally distributed? 2. A political candidate hires you to find what is the level of support in the population. You poll a number of people and record their answers. Let X i = 1 if person i said they supported the candidate and X i = 0 otherwise. You are interested in building a confidence interval for π = P ( X = 1).
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