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Assignment 1 Exercise 1.3

This document contains the solutions to several probability exercises from a Quantitative Methods for Finance course assignment. Exercise 1.3 calculates the probabilities of (a) both people chosen being women, (b) both being men, and (c) one being a man and the other a woman, from a group of 8 women and 6 men. Exercise 1.10 calculates (a) the expected number of sets and (b) the variance in a tennis match where each set is equally likely to be won by either player and results are independent. The expected number of sets is 2.5 and the variance is 0.25. Exercise 1.12 calculates the mean and standard deviation of a lawyer's fee if they

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395 views3 pages

Assignment 1 Exercise 1.3

This document contains the solutions to several probability exercises from a Quantitative Methods for Finance course assignment. Exercise 1.3 calculates the probabilities of (a) both people chosen being women, (b) both being men, and (c) one being a man and the other a woman, from a group of 8 women and 6 men. Exercise 1.10 calculates (a) the expected number of sets and (b) the variance in a tennis match where each set is equally likely to be won by either player and results are independent. The expected number of sets is 2.5 and the variance is 0.25. Exercise 1.12 calculates the mean and standard deviation of a lawyer's fee if they

Uploaded by

Phạm Đăng Khoa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Group member: PHAM NGOC MINH THUY – BAFNIU19034

PHAM DANG KHOA – BAFNIU19015


Course: Quantitative Methods for Finance
Semester: 1, 2021-2022

ASSIGNMENT 1

Exercise 1.3
If two people are randomly chosen from a group of eight women and six men, what is the
probability that
(a) both are women;
8 7 4
P (W1, W2) = x =
14 13 13

(b) both are men;


6 5 15
P (M1, M2) = x =
14 13 91

(c) one is a man and the other a women?


4 15 48
P (W1, M2) or P (M1, W2) = 1 - - =
13 91 91

Exercise 1.10
Two players play a tennis match, which ends when one of the players has won two sets.
Suppose that each set is equally likely to be won by either player, and that the results
from different sets are independent. Find
(a) the expected value
In a tennis match, there are usually 3 sets.
A: the set won by player 1
B: the set won by player 2
x: the number of sets played
 There are 6 situations, including:

Set 1 Set 2 Set 3 xi p(xi)


A A 2 0.5 x 0.5 0.5
B B 2 0.5 x 0.5 0.5
A B A 3 0.5 x 0.5 x 0.5 0.375
B A B 3 0.5 x 0.5 x 0.5 0.375
B A A 3 0.5 x 0.5 x 0.5 0.375
A B B 3 0.5 x 0.5 x 0.5 0.375

E(x) = 0.5 + 0.5 + 0.375 + 0.375 + 0.375 + 0.375 = 2.5

(b) the variance of number of sets played

xi -  [(xi-)2] p(xi)
-0.5 0.25 0.25 0.0625
-0.5 0.25 0.25 0.0625
0.5 0.25 0.125 0.03125
0.5 0.25 0.125 0.03125
0.5 0.25 0.125 0.03125
0.5 0.25 0.125 0.03125
Var(x) = E[(x-)2] = 0.0625 + 0.0625 + 0.03125 + 0.03125 + 0.03125 + 0.03125 = 0.25

Exercise 1.12
A lawyer must decide whether to charge a fixed fee of $5,000 or take a contingency fee of
$25,000 if she wins the case (and 0 if she loses). She estimates that her probability of
winning is .30. Determine the mean and standard deviation of her fee if
(a) she takes the fixed fee;
X: the fee would be received
No matter if a lawyer wins or loses the case, she will certainly get $5,000.
 P (X=5000) = 1
 E(X) = P(X) x X = 1 x 5000 = 5000
 Var(X) = E[(X-)2] = 0
 SD(X) = 0

(b) she takes the contingency fee.


Xi P(Xi)
Win 25000 0.3 7500
Lose 0 0.7 0
 E(X) = 7500 + 0 = 7500

Xi -  [(Xi-)2] P(Xi)
17500 175002 0.3 91875000
-7500 (-7500)2 0.7 39375000

 Var(X) = E[(X-)2] = 91875000 + 39375000 = 131250000


 SD(X) = 11456.43

Exercise 1.18
Suppose that – in any given time period – a certain stock is equally likely to go up 1 unit or
down 1 unit, and that the outcomes of different periods are independent. Let X be the
amount the stock goes up (either 1 or -1) in the first period, and let Y be the cumulative
amount it goes up in the first three periods. Find the correlation between X and Y.
X can be either 1 or -1
 E(X) = 0.5 x 1 + 0.5 x (-1) = 0
 Var(X) = E(X2) – [E(X)]2 = 1 – 0 = 1
 SD(X) = 1

Y = X1 + X2 + X3
 E(Y) = E(X1) + E(X2) + E(X3) = 0 + 0 + 0 = 0
 Var(Y) = Var(X1) + Var(X2) + Var(X3) = 1 + 1 + 1 = 3
 SD(Y) = √ 3

X is the amount the stock goes up in the first period => X=X1
We have:
Cov(X,Y) = Cov(X,X1 + X2 + X3)
= Cov(X, X1) + Cov(X,X2) + Cov(X,X3)

 Cov(X,Y) = Cov(X1,X1) + Cov(X1,X2) + Cov(X1,X3)

Because the outcomes of different periods are independent


 Cov(X1,X2) = Cov(X1,X3) = 0

 Cov(X,Y) = Cov(X,X) = Var(X) = 1

Cov ( X , Y ) 1
 Corr(X,Y) = = √3
SD ( X ) . SD ( Y )

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