Indian Institute of Management Bangalore

Postgraduate Programme in Management

Decision Sciences I
Problem Set
1. We have seen that outliers impact the summary statistics. Which of the following is true in
order of “least affected by outliers” to “most affected by outliers”?
a) Mean, Median, Range
b) Median, Mean, Range
c) Range, Median, Mean
d) None of the above.

2. A product has a market share of 30%. If you are doing a survey and expect that in your
sample, there will be 60 people who used the product. What will be your sample size?
a) 210
b) 220
c) 140
d) 200
3. The histogram plot of the marks of PGP 2013-15 batch in DS course was symmetric.
Which of the following can happen?
a) Kurtosis is greater than 3.
b) Skewness is zero.
c) Mean is more than 40.
d) Mean, Mode and Median are equal.

4. A multiple choice test with a maximum marks 100 is given to 100 students. The class
average was 65 and standard deviation was 2.5. Give an idea about the number of students
who could have received marks between 60 and 70.

a) 70
b) 65
c) 75
d) 80
5. In PGP 1 batch, 20% are sports persons. If you randomly select a group of 50 people from
PGP 1, then
a) Expected number of sports persons in that group is 10.
b) Most preferable number in that group who play sports is 9 and 10.
c) Most preferable number of sports persons in that group is 10.
d) Density plot of that group will be right skewed.
6. X is a random variable. Only information we have is that expectation and mode of X are
equal. Which of the following can happen?
a) The distribution of X will be always symmetric.
b) The distribution of X will be always left skewed.
c) The distribution of X will be always right skewed.
d) None of the above.
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7. X is a random variable which takes the values 1, 2, …., 10. Which of the following will
always happen?

a) Probability of X at 7 is greater than or equal to Probability of X at 8.

b) Cumulative distribution of X at 7 is less from cumulative distribution of X at 8.
c) Cumulative distribution of X at 7 is less than or equal to cumulative
distribution of X at 8.
d) Cumulative distribution of X at 10 is one.

8. If a data set has kurtosis 7, skewness and mean are zero. Which of the following can
happen?

a) Median of the data set will occur at zero.

b) It will follow left skewed distribution.
c) The mode of the data set is zero.
d) The tail of the density plot will be thick.

9. If there is a war every 15 years on the average. Which of the following can happen?

a) A war cannot break out in more than 15 years.

b) The variance of number of wars breaking out in 15 years is one.
c) On an average in two different time intervals, equal number of wars will break
out.
d) On an average in 30 years, total number of wars breaking out is 2.

10. The colour of a person's eyes is determined by a single pair of genes. If they are both
blue-eyed genes, then the person will have blue eyes; if they are both brown-eyed genes, then
the person will have brown eyes; and if one is a brown-eyed gene and the other is a blue-eyed
gene, then the person will have brown eyes (the brown-eyed gene is dominant over the blue-
eyed gene). A new born child independently receives one eye gene from each of its parents,
and the gene it receives from a parent is equally likely to be either one of the genes of that
parent. Suppose Prince and both of his parents have brown eyes, but Prince's sister has blue
eyes.

Suppose that Prince's wife has blue eyes. Find the probability that their first child will have
blue eyes.

11. The probability of detecting a disease in X- ray examination of a person suffering from
the disease is 3/5. The probability of diagnosing a healthy person as suffering from the
disease is 1/5. 30% of the whole population is suffering from the disease. Find the probability
that a person is healthy, if after examination the person is diagnosed as suffering from the
disease.

12. After the correction of quiz 1 answer books, it is found that 50% of the PGP 1 students
got more than 60% marks in DS1 paper. A random sample of twenty students is selected.

(Exact numerical answer is not required. Only steps and mathematical formulation will be
enough)

a) What is the expected number of students in that group who scored more than 60% marks?

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 b) What is the probability that at least 10 students in the selected sample got more than 60%
marks?
c) Can you plot a rough probability distribution of marks of that group?

13. In your mess, 100 litres of water is supposed to be polluted with 106 bacteria. Find the
probability that a sample of 1 c.c of the same water is free from bacteria.

1 litre = 1000 c.c

14. The following table gives the number of DS students of a business school by section and
by grade. The column stands for section and the row stands for the Grade.

Section A Section B Section C Section D Section E Section F

Grade A 20 22 30 18 20 10
Grade B 25 30 45 40 30 40
Grade C 15 20 5 4 20 26

a) What is the probability that a randomly chosen student is from Section C?

b) Given that a student is from Section D, what is the probability that his/her grade is B?
c) What is the probability that a randomly selected student is either from Section F or from
Section E?
d) What is the probability that a randomly selected student is either from Section B or his/her
grade is A (or both)?
e) Given that a student’s grade is B, what is the probability that he/she is from Section C?
f) What is the probability that a randomly chosen student’s grade is C?

15. Sketch the cumulative distribution function curve ofZ, the standard Normal random
variable.

i) Show in the graph the probability that Z is more than 1.5.

ii) Compute the probability that Z2 lies between 1 and 9. Also, show this
probability on the same graph.

16. The cumulative distribution function F (x) of a random variable X is defined as

follows
F ( x )= A -∞ < x < -1
=B -1 ≤ x < 2
=C 2≤ x <∞
If P ( X >1 )=2 /3, find the constants A,B, and C. Sketch the F ( x ).
17. Three tests have been taken by a very large number of students. LetX , score in test 1,
follow N ( 60 , σ=10 ); Y , score in test 2, follow N ( 50 , σ=8 ) ; and Z , score ∈test 3 ,
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 follow N ( 70 , σ=9 ). The test scores are independent. Let the combined score in the
three tests be defined as W =X +3 Y + 4 Z.

a) Find the median, mode and variance of W .

b) IfX , Y and Z were not independent can you give some idea of its variance?
c) In a randomly selected group of 10 students who have taken all the three tests,
what is the probability that
i) exactly 3 of them have a combined score of more than 200?
ii) up to 2 students have a combined score of more than 200?

18. The daily return of a stock varies uniformly from -2% to 3%.What is the expected
value of the squared return? Sketch the return density.

19. Daily return of a stock is normally distributed. The return takes the value of at least
1.78% once in 5 days and of at least 1.65% in 7 out of 10 days.
a) Sketch the above information using the graph of the return density.
b) What are the mean and standard deviation of the return?
c) Find the probability that on a given day the return will be exactly 2.5%?

20. Suppose that the amount of time Anuja spends in a bank is exponentially distributed
with mean 10 minutes.

a) What is the probability that Anuja will spend more than 15 minutes in the bank
given that she has already spent 10 minutes in the bank?
b) What is the probability that Anuja will spend more than 20 minutes in the bank
given that she has already spent 15 minutes in the bank?
c) What is the probability that Anuja will spend more than 25 minutes in the bank
given that she has already spent 19 minutes in the bank?
d) Can you make some comment from the above three results?
e) If you pick 5 randomly selected Anuja’s visits to the bank, what is the probability
that she never waited for more than 10 minutes?

21. X is a Normal random variable with mean 21 and variance 25. If

P( X > y∨X >28)=0.625, find y.

22. Let X  be the time between two calls received at a health-care provider. It is given that the mean time
between calls is 12 minutes.
a) Find the probability that the first call will be within 5 to 10 minutes?
b) What is the probability that the time between tenth and eleventh call will exceed 2 minutes?

23. A manufacturer produces iron rod of length L meters, where L is distributed uniformly over the
interval [15, 30]. After producing the iron rod he will send those rods to his supplier by pick-up trucks
each of which can carry exactly 20 iron rods.

Find the probability that each of 3 randomly selected pick-up trucks will contain at least 8 iron rods of
length more than 24 meters?

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 24. A business office orders paper supplies from one of three vendors,V 1 ,V 2, orV 3.
Orders are to be placed on two successive days, one order per day. Thus, (V 2 ,V 3)
might denote that vendor V 2 gets the order on the first day and vendor V 3 gets the
order on the second day.

a) List the sample points in this experiment of ordering paper on two successive
days.

25. A group of students (consisting of PGPIs and PGPIIs) of one of the IIMs had
undertaken a study on Detergent Powder. The study was sponsored by Proctor and
Gamble, in a Marketing Fair, held in November, 1998. The main objective of the
study was to understand the “Brand Images” of a number of brands of Detergent
Powder. The following seven brands were included in the project:

1. Ariel Compact (AC), 2. Ariel Supersoaker (AS)

3. Surf Excel (SE), 4. Surf with Wash Booster (SB)
5. Nirma (N), 6. Wheel (W), and 7. Rin (R).

Through several Focus Group Discussions (FGDs), the Study Team identified 19 image
parameters, which were reduced to set of eight image parameters (through a technique called
Factor Analysis). The eight image parameters thus identified are given below:
1. Innovative, 2. Indianness, 3. Gentle, 4. Young and Energetic
5. Trustworthy and Caring, 6. Versatile, 7. Powerful and efficient, and 8. Modern.
A game was designed to collect data from the female respondents only. Data on a large
number of demographic variables such as, age, education, occupation, marital status, monthly
income etc. were collected for each respondent. Each respondent was asked to select three
brands (two used by her, and one not used but she was aware of) from the set of seven
brands. Then she was asked to rate each brand on a 5-point scale (giving a rating of l if she
thought that the particular image parameter was least, and 5 if she perceived it to be highest
in the brand) on each of the eight image parameters.

Two brands, namely, Nirma and Wheel had to be discarded from analysis because of
inadequate responses on these two brands.
A measure of “Image” of a brand, as perceived by a respondent, was obtained by averaging
the ratings across all eight “Image Parameters” by the respondent for the brand. For each
respondent, one of the rated brands was then used for understanding “Image” of the brand.
The Study Group wanted to find out whether there was significant difference in “Image”
across the brands; in case there was, which brand had the “Best Image”, what score could
reasonably indicate the “Best Image” brand, and so forth. Unfortunately, the PGPIIs had
forgotten all that they had learnt in QM courses in the first year, while for PGPIs, the QM
courses had just started then. So, though, the team framed a set of questions but they
remained unanswered. Now that you have just finished QMM, can you answer following
questions with the help of the data given in Tables 1, 2 and 3?

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The Project team was particularly concerned about the assumption of normality of the ratings.
Checking this assumption for each brand was considered to be time consuming and
unnecessary. The members of the team argued that if the assumption was true for one brand,
it must also be true for others. Therefore, it was decided to test the assumption for only one of
the brands.

a. Carry out a suitable test to test the normality of the Image scores using the data in
Table 1 for Ariel Compact.
b. Assuming normality of the image scores for all brands, test if there is a significant
difference in the average “Image” scores among the five brands.
c. If the assumption of normality of image scores is valid, test if there is a significant
difference in the variance of “Image” scores between the first two brands.
d. If the assumption of normality is not valid, test if there is any significant difference
between the distributions of the last two brands.
e. Determine which brand has the “Best Image” on the basis of highest average image
score.
f. Calculate a 95% confidence interval for average image score for the “Best Image”
brand.
g. Assuming equality of variance, calculate a 90% confidence interval for the common
2 2
variance of image scores. ( χ 0 .95; 95 = 73.3050, χ 0 .05 ; 95 = 118.5232)
h. After the Marketing Fair, when the team sat down to do the data analysis, it figured
out that each respondent had given highest rating to exactly one of the three brands
she had rated. One of the members of the group argued that the choice of “Best
Image” brand must be related to the respondent’s exposure level to the advertisement
of the product. But as they did not collect any information on respondents’ exposure
to advertisement, another member suggested that the selection of “Best Image” brand
might be related to her income. Table 3 was thus formed using the information of 212
responses. Test if this is true at 5% level of significance.

i. Ariel Supersoaker was considered to be a competitor of Surf with Wash Booster. The
study team was thus interested in finding out if there was a significant difference in
the market share of these two brands. The first 100 respondents were asked if they
used Ariel Supersoaker; 27 of them responded in the affirmative. While out of the
next hundred, 32 respondents said they used Surf with Wash Booster. What can you
conclude (use p-value)?

Table 1: “Brand Image” Scores: For twenty randomly

Selected respondents for each brand
AC AS SE SB R
4.1 4.1 4.1 3.7 3.1
5.0 5.0 4.4 4.6 2.9
5.0 5.0 4.7 4.8 3.5
4.8 3.8 4.6 4.3 2.4

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 4.5 4.5 4.2 4.5 3.5
4.6 4.6 4.5 3.4 3.0
4.9 3.9 4.0 4.2 2.7
4.4 4.4 4.3 4.9 2.5
4.4 4.4 4.3 3.4 3.0
4.9 4.9 4.2 4.4 2.8
3.8 3.8 5.0 4.9 2.2
3.7 3.7 4.6 3.7 2.5
3.5 3.5 4.9 4.6 2.5
3.8 3.8 4.9 3.7 2.2
3.9 4.4 4.5 4.0 2.0
3.6 3.6 4.9 3.9 2.6
3.7 3.7 4.9 4.2 2.7
3.6 3.6 4.9 3.3 2.1
3.8 4.8 4.8 3.8 2.3
3.2 4.2 5.0 4.0 2.2

Table 2: Summary Statistics for Table 1

AC AS SE SB R
Sum of all 20 observations 83.20 83.70 91.70 82.30 52.70
Sum of Squares of all 20 observations 352.32 355.0 422.4 343.4 142.4
7 3 9 3
SD of all 20 observations 0.5716 0.501 0.323 0.504 0.433
9 3 0 2

Table 3: Number of respondents: “Best Image” brand versus Monthly Income

Monthly Income AC AS SE SB R Total
Rs. 10000 or more 19 12 61 14 - 106
Rs. 5000 - Rs. 10000 26 22 14 10 - 72
Below Rs.5000 7 7 8 7 5 34
Total 52 41 83 31 5 212

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26. Three researchers have collected household income data from three districts, A, B,
and C, independently and individually. They wish to investigate the income
distributions in these districts. The summary of their sample data are given below.

a) The first researcher takes a sample of size 9 from district A. The upper limit of
95% C.I. of the population variance of income is 29.10. The 95% C.I. of the
population mean income is (17.84, 22.16).

b) The second researcher takes a sample from district B such that the expected value
of (n2 -1) (S22/σ 22) is 7 and the midpoint of the 95% C.I. of the population mean is
22 and length of the C.I. is 7.80.

c) The third researcher takes a sample from district C such that the expected value of
(n3 -1) (S23/σ 32) is 10 and the midpoint of the 95% C.I. of the population mean is 23.

d) The 95% C.I. of (σ 22/σ 32) is (0.20, 14.06).

From the above information (and clearly stating the assumptions which are needed)

i. Verify whether the mean income in the above three districts are equal or
not.

ii. Verify if the income variabilities in the districts AandB are equal or not.

iii. Give a 95% C.I. for the difference of mean incomes in the districts Aand
C.

27. The following data represent the monthly sales in lakhs of rupees of a new start-up for
10 randomly selected months. The sample mean is 20.7 and the sample SD is 4.8.

15.04 20.50 15.21 18.34 24.92 22.87 16.63 20.98 31.75 20.62

a) Would it be reasonable to assume that the monthly sales are normally

distributed?

b) Test if the median monthly sales is 20 lakhs or it is greater than 20 lakhs.

28. In a 5-star Hotel in Bangalore, on an average, 4 ISD calls are received every 2 hours.
It is given that on a particular day 30 ISD calls have been received.

a) What is the probability that a total of 6 ISD calls have been received between 9
p.m. to 11 p.m.?

b) What is the expected number of calls in that time interval?

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 29. An advertising agency notices that approximately 1 in 50 potential buyers of a
product sees a given magazine advertisement, and 1 in 5 sees a corresponding
advertisement on television. One in 100 sees both. One in 3 actually purchases the
product after seeing the advertisement, 1 in 10 without seeing it. What is the
probability that a randomly selected potential customer will purchase the product?

30. X is a random variable with p.d.f defined below:

f (x)=k (x−1)1< x ≤2
¿ k – ( x−2)/6 2< x<5
a) Find k and sketch the graph
b) Find the first quartile ofX .
31. The marketing team of a company desires to test whether the average monthly sales is
30 lakhs (as was targeted) or less than 30 lakhs. One person from the team collects a
sample of same size 10. A second person from the team selects another sample of the
same size. The first person rejects the null if her sample mean is less than K, and the
second person rejects the null if her sample mean is less thanL. The team leader finds
thatK > L.
a) Who is testing at a lower significance level? Why?
b) Who has a higher chance of committing type II error? Why?
c) What should the person, testing with a higher significance level, do to reduce her
significance level to that of the other keeping the decision rule same? Why?
d) Suppose α =0.05 . If type I error occurs, the company spends 5 lakhs per month on
advertisement for increasing the average sales. On the other hand, if type II error
occurs with maximum probability, the company loses ₹ 100,000. Which type of error
is more important for the company? Why?
In the daily production of a certain kind of rope, the number of defects per foot,Y , is
assumed to have a Poisson distribution with mean 2. The profit per foot when the rope
is sold is given byX , where X =50−2 Y −Y 2. Find the expected profit per foot.

32. Rahul, a young IT professional, is considering the possibility of establishing an

Educational Portal for prospective MBA aspirants and wishes to conduct a survey.
Based upon the cost of setting up such a portal and the profits that may be generated,
he has arrived at the following conclusion: if there is evidence that the average
revenue per candidate is more than Rs.2500, then the portal will be established;
otherwise, the portal will not be established. Based on past experience of several other
such portals, the standard deviation of revenue is estimated to be Rs.500. Rahul wants
to be 99% certain of not committing an error of establishing the portal when the actual
average revenue is at most Rs.2500 per candidate.

a. If Rahul wishes to have a 2.5% chance of not establishing the portal when the actual
average revenue is Rs.3000, what sample size should be selected?
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 b. If Rahul decides that a random sample of 20 candidates should be surveyed, compute
the probability of establishing the portal when the actual average revenue is Rs.3000
per candidate.
c. Discuss the difference in your results in a) and b).
d. A sample of 25 candidates is actually surveyed yielding a sample average revenue of
Rs.2825 with a sample standard deviation of Rs.675. Construct a 95% confidence interval
for i. The population average revenue, ii. The population standard deviation of revenue.
e. Assuming the population standard deviation to be Rs.500, at 1% level of significance,
determine whether there is evidence that the population average revenue anticipated
exceeds Rs.2500.

33. The table below gives the employee-category distribution of IIMB. Draw a sample of
20 employees using a) simple random sampling, b) systematic sampling, and c)
stratified random sampling.

Employee Category No. of Employees

D: Class III 30
C: Secretarial 100
B: Officers 30
E: Faculty 60

34. If it is known that the standard deviation of monthly income of the employees is
Rs.5000, then what is the probability that a random sample of 25 employees will yield
an average monthly income, which is within Rs.500 around the actual average
monthly income?
35. A contractor has found through experience that the lowest bids for a job (excluding
his own bid) is a random variable uniformly distributed over the interval [3C/4, 2C],
where C is the contractor's cost estimate (no profit or loss) of the job. If the profit is
defined as 0, if the contractor does not get the job (his bid is greater than the lowest
bid) and as the difference between his bid and his estimated cost C, if he gets the job,
what should he bid (in terms of C) in order to maximize his expected profit?
36. A highway restaurant is trying to plan its capacity. It finds that on average during the
peak lunch hour, which is between 1pm and 2 pm, vehicles arrive at a rate of 1
vehicle per 6 minutes. (Each vehicle on average has four customers, and they can all
sit on one table.) To avoid incurring a loss on a particular day, there should be at least
6 vehicles arriving during the peak lunch hour period.
a. What is the probability of the restaurant incurring a loss on any given day?
b. If more than 3 vehicles arrive during a ten minute period, there will be
overcrowding and the customers will either have to wait or may decide to
leave. What is the probability of this occurring on any given ten minute
period? They want to tackle the problem of overcrowding. The Manager feels
that the peak hour period should be divided into 10 minute intervals. If there
are 3 or fewer vehicle arrivals in any specific interval, there is no
overcrowding in that interval. What is the probability that there is

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 overcrowding in exactly one such 10 minute intervals within this peak hour
period?
c. The 10-minute intervals are consecutively numbered and observed whether
overcrowded or otherwise. What is the probability that the 3 rd overcrowded
interval is the 5th interval, starting from 1 pm?
d. Given that on a particular day, the restaurant just barely avoids incurring a
loss, what is the chance that no vehicle arrived in the first 10 minutes of the
peak lunch hour on that day?

37. The ABC Company produces detergent packets of 1 kg each for the lower income
segments. Its competitor announces that it guarantees that its 1 kg packets never fall
short on weight. ABC knows that its filling machines are set at 1.10 kg and that the
standard deviation of the quantity filled is 50 grams.
a. What percentage of the packets sold by ABC is below the 1 kg level?
b. If ABC wants at most 1% to be below 1 kg, then where must it set the mean value
for the filling machine? Assume that the standard deviation does not change.
c. The production manager comes up with an alternative. He says with an investment
of Rs. 60,000, they can reduce the standard deviation to 35 grams and keep the
mean setting at the same level of 1.10 kg. Assigning a cost of Rs.3 to each packet
that is of lower weight than 1 kg (in terms of customer goodwill loss etc.), is this
investment justified? Assume that they sell a million packets a year and would
want to recover the investment in the first year of operations.
38. An expert is asked to estimate the characteristics of the monthly disposable income of
a population. She estimates the average value to be Rs. 1000 and that 75% of the
population have a disposable income between Rs. 600 and Rs.1400.
a. What is the minimum disposable income of the top 5% of the population?
b. If the size of the population is 150000, how many people have a disposable
income below Rs. 500?
39. A proposal has an immediate investment of Rs. 600000. The estimated life of the
proposal is 6 years. The annual cash earnings are uncertain with an expected value of
annual cash earnings is Rs. 180000. The required rate of return is 9% per annum. The
annual earnings estimate of Rs. 180000 has a 30% chance of being off by more than
Rs. 30000 in either direction. The proposal will not be accepted if there is a 15%
chance of losing money. Should the proposal be accepted?
40. The maintenance department of a large IT company plans to ascertain the conditions
of PCs and the cost of their repair. There are altogether 10000 PCs, a list of which is
maintained by the company. From this list, in a pilot survey, a simple random sample
of size 100 PCs was selected without replacements. Technicians were sent out to
examine the conditions of the PCs selected, and to calculate the cost of needed
repairs. The results of this inspection were as follows: sample average repair cost =
Rs. 830; sample standard deviation of repair cost = Rs. 110. How many additional
PCs must be sampled if the estimate of the total cost of repairing all PCs (formed by
pooling the observations in the pilot and the planned sample) is to be within Rs.
100000 of the true total cost with probability 90%?

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Problem 1
In the upcoming exchange program for PGP2 students, 50% prefer to go to Europe, 20%
prefer to go to US, and the rest are split between Australia, China, and Japan. A poll was
conducted asking 400 randomly selected students about their preferences. What is the chance
that less than one hundred of those polled preferred Australia, China, and Japan? Use
Φ (−2.18 )=0.015. [Φ ( x) denotes the probability up to x for a standard normal distribution.]

Problem 2
When and why do we use t distribution in hypothesis testing? Which of the
differences is larger when n is fixed? Justify.
(t 0.02 ,n−t 0.08 , n)∨(t 0.08 ,n−t 0.14 , n)

Problem 3
In 2017, 700 students graduated from Goa Business School. In their Annual Placement
Report the following information is given.
Work Experience (Bottom) \ Salary <10 LPA Between 10 More
(Right) to 15 LPA than 15
LPA
Less than 2 years 170 70 30
More than 2 years 85 190 155

Does work experience impact salary? Justify with appropriate numbers. (LPA – Lakhs per
annum.).

Problem 4
After graduation from IIMB, Haridas joins the Bank of Billekahalli. He observes that 1 in
every 100 borrowers does a loan default. He designs a test to predict which borrower will
default. After implementation, he finds that the test has 4% false positive rate and no false
negative rate. A randomly selected borrower tests positive. What is the probability that he
will truly default?

Problem 5
After working for two years at the Bank of Billekahalli, Haridas found the job to be
monotonous and he decided to join a leading political research group called ‘Quantitative
Political Researcher’. He is now asked – “whether people living in the same household tend
to make independent political choices?” He selected two hundred households with exactly
three members eligible for voting. In his survey, he asked the residents separately to answer
‘yes/no’ for any given political party and summarized the responses for one party as follows.

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 Number of people 0 1 2 3
saying yes
Frequency 4 46 73 41
0

Make suitable assumptions and perform an appropriate goodness of fit test for this data for
α =0.05. (Use χ 20.95,2 =5.99¿

Problem 6
In analysis of variance, we have three sum of squares – Total sum of squares (SST), Between
Group Sum of Squares (SSB) and Within Group Sum of Squares (SSE).
1) Arrange these three quantities in the order of increasing means, if possible.
2) Are SSB and SSE independent? Justify.
3) Find the missing values (P, Q, R, S, and T) in this ANOVA Table given below.
4) Can you guess the conclusion without looking up the table of Fvalues?

Source df SS MS F
Between Group 4 P Q 6.40
Within Group R S 10.60
Total T 377.3
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Problem 7

a) Let r t be the monthly returns of a stock that is known to follow normal distribution
with a mean of 5% and SD of 2%. Find P=P ( r t >7.5 % ) .

b) In order to test if the proportion of months with monthly returns of at least 7.5% is
more or less than P (found in a) above), monthly returns of last five years are
obtained. It is found that 10 of the months have returns at least 7.5%. What can you
conclude from this data and your analysis?

c) Suppose sample means and variances of daily returns of two stocks are X́ 1 ,S21 , and X́ 2 ,
S22 respectively. To test the equality of variances of the daily returns of the two stocks,
S 12
you decide to reject the null if the ratio
( )
S 22
is less thank. where k is defined by

S1 2 S 22
Pr
[ ] [
S2 2
< k =Pr
S 12
<1/k
]
Is the decision rule reasonable? Justify graphically

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