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13216853191 - positive momentum effect to the sequence...

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Problem Set 3 Marked out of 5 (and the best two out of three Problem Set marks contribute 10 marks to your overall mark for). Due Date: In class as a hardcopy 6pm Monday 21 st November 2011. Question 1 [1 mark] In statistics, what is the meaning of, and difference between: i. A type I error. ii. A type II error. Question 2 [1 mark] Let U be an upwards movement in the market. Let D be a downwards movement in the market. Given the following sequence: U, U, U, U, D, D, U, D, U, U, D, D, D, D, U, U, D, U, U, U Calculate the following: i. p(U│U) ii. p(U│D) iii. Using your answers from Question 2 to parts i. and ii., does this imply there’s a
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Unformatted text preview: positive momentum effect to the sequence? Question 3 [3 marks] Let A be the arithmetic mean. Let G be the geometric mean. Let σ 2 be the variance. i. Show, using 2 returns (where return 1 = x, and return 2 = y) that: A 2 = G 2 + σ 2 From the answer to Question 3 part i., what does this imply with respect to the following: ii. If there is no variance to asset returns? iii. If the arithmetic mean is maximised, yet the geometric mean is unchanged? iv. The geometric mean is maximised?...
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