This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 119 APPENDIX B SOLUTIONS TO PROBLEMS B.1 Before the student takes the SAT exam, we do not know – nor can we predict with certainty – what the score will be. The actual score depends on numerous factors, many of which we cannot even list, let alone know ahead of time. (The student’s innate ability, how the student feels on exam day, and which particular questions were asked, are just a few.) The eventual SAT score clearly satisfies the requirements of a random variable. B.3 (i) Let Y it be the binary variable equal to one if fund i outperforms the market in year t . By assumption, P( Y it = 1) = .5 (a 50-50 chance of outperforming the market for each fund in each year). Now, for any fund, we are also assuming that performance relative to the market is independent across years. But then the probability that fund
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