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# Homework 2 - ECON 4620-5620 Homework 2 1 The following...

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ECON 4620-5620 Homework 2 1. The following table gives the anticipated 1-year rates of return from a certain investment and their probabilities. ANTICIPATED 1-YEAR RATE OF RETURN FROM A CERTAIN INVESTMENT Rate of return ( X )% f( X ) -20 0.10 -10 0.15 10 0.45 25 0.25 30 0.05 Total 1.00 a. What is the expected rate of return from this investment? b. Find the variance and standard deviation of the rate of return. c. Find the skewness and kurtosis coefficients. d. Find the cumulative distribution function (CDF) and obtain the probability that the rate of return is 10 percent or less. 2. Consider formulas (B.32) and (B.33) B.32: var(X+Y) = var(X) + var(Y) + 2ρσ X σ Y B.33: var(X - Y) = var(X) + var(Y) - 2ρσ X σ Y Let X stand for the rate of return on a security, say IBM, and Y the rate of return on another security, say, General Foods. Let s 2 (X) = 16, s 2 (Y) = 9, and r = -0.8. What is the variance of (X + Y) in this case? Is it greater than or smaller than var(X)+var(Y)? In this instance, is it better to invest equally in the two securities (i.e., diversify) than in either security exclusively? This

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Homework 2 - ECON 4620-5620 Homework 2 1 The following...

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