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ISOM111 Business Statistics (Fall 2010) Tutorial Exercise 3
1. Following is a table summarizing the estimated returns for stock X and stock Y per $1,000,000
under four economic conditions (in $1,000)
P
(
X
=
x
i
,Y
=
y
i
)
StockX
StockY
0.1
100
100
0.3
20
80
0.4
100
70
0.2
180
20
Suppose you are deciding between these two alternative investments for the coming year 2010.
(a) Compute the expected returns of stock X and stock Y and their standard deviations
(b) Compute the covariance between Stock X and Stock Y and brie
f
y describe their relationship.
(c) Suppose you have $1,000,000 and decide to invest $600,000 in Stock X and $400,000 in Stock
Y. With this as your investment portfolio, what is the mean and the standard deviation of
the annual return for the coming year?
2. There are two possible causes for a breakdown of a machine. To check the
F
rst possibility would
cost $100, if that were the cause of the breakdown, the trouble could be repaired at a cost of
$1000.
Similarly, there are $500 check cost and $2000 repair cost associated with the second
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 Fall '10
 Hu,Inchi

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