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Econ 281 Fall Quarter 2010
Problem Set 2  Solutions
1.
Book problems: 4.1; 4.3ae, g; 4.4
•
Note: In problem 4.1 c the betahats are off
•
In problem 4.1 d: Don’t square R2=0.08
–
Solutions: TSS=14,088
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Calculate the following Probabilities
a.
If Y~N(2,4) calculate Pr(Y<3)=.6915
b.
If Y~N(4,9) calculate Pr(Y>0) =.9082
c.
If Y~N(8,2) calculate Pr(6<Y<8) = .4207
3.
Consider a portfolio consisting of two assets X and Y. Asset X has a mean return of
4% and a standard deviation of 9. Asset Y has a mean return of 12% and a standard
deviation of 15. You have invested 70% of your money in asset X and 30% in asset
Y. Assume that E(XY)=4%. What is the mean and standard deviation of the return of
your portfolio?
The general formula for the variance of two RVs is
XY
Y
X
c
b
c
b
Y
c
X
b
a
V
σ
⋅
⋅
⋅
±
⋅
+
⋅
=
⋅
±
⋅
+
2
)
(
2
2
2
2
. However, we need to find out
about the value of the covariance. Since the conditional mean of the two RVs is equal
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This note was uploaded on 01/14/2012 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.
 Spring '08
 Witte
 Macroeconomics

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