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ECON 425
ASSIGNMENT 2
Dr. AHN
DUE September 20 (Tuesday)
(Show your effort; otherwise, no credit will be given)
1.
(10 pts.)
Let
X
stand for the rate of return on a security (say, Intel) and
Y
the rate of return on
another security (say, Motorola).
Let
x
=
y
= 0.5,
x
2
=
y
2
= 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
100
Y
and
2
43
Y
.
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(101
103)
Y
.

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