Assignment 2

Assignment 2 - ECON 425 ASSIGNMENT 2 DUE September 20...

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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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This document was uploaded on 02/10/2012.

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