ECON 425 ASSIGNMENT 2 Dr. AHNDUE September 20 (Tuesday)(Show your effort; otherwise, no credit will be given)1. (10 pts.) Let Xstand for the rate of return on a security (say, Intel) and Ythe rate of return on another security (say, Motorola). Let x= y= 0.5, x2= y2= 4 and xy= corr(x,y) = 0. Suppose that you have two possible investment strategies: Under Strategy I, you invest equally in the two securities; and under Strategy II, you invest 20 % of your asset in the security of Intel and 80 % in that of Motorola. Which strategy is desirable? Explain why by computing and comparing the expected returns and the variances of the returns from the two investment strategies. [Hint: Look at Q3 of Exercise 1.] 2. (20 pts.; 10 pts. on each) In a population with 100Yand 243Y. Use the central limit theorem to answer the following questions. 1) In a random sample of size n= 100, find Pr(101)Y. 2) In a random sample of size n= 165, find Pr(101103)Y.
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