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Week 2 solution

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9 views

Week 2 solution

Uploaded by

Goutham vignesh J
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Week 2: Probability Modelling and Statistics

Question 1-4: Consider the information on returns for a security provided in the table here and answer the
following questions.

Question 1: Given the probabilities, what is the correct interval for expected returns.

a) -15% to -10%
b) -10% to -5%
c) -5% to 0%
d) 0% to 5%
e) 5% to 10%

Hint: E(R)= 0.1*20%+0.25*10%+0.30*0.0%+0.25*(-15%)+0.10*(-30%)=-2.25%

Question 2: In the absence of probabilities (assuming all cases equally likely), what are the
expected returns..

a) -15% to -10%
b) -10% to -5%
c) -5% to 0%
d) 0% to 5%
e) 5% to 10%

𝟏
Hint: E(R)= 𝟓 (𝟐𝟎% + 𝟏𝟎% + 𝟎% − 𝟏𝟓% − 𝟑𝟎%) = −𝟑. 𝟎𝟎%
Question 3: Given the probabilities, what is the standard deviation of returns.

a) 1% to 5%
b) 5% to 10%
c) 10% to 15%
d) 15% to 20%
e) None of the all

𝟐 𝟐
Hint: Variance = 𝟎. 𝟏𝟎 ∗ (𝟐𝟎% − (−𝟐. 𝟐𝟓%)) + 𝟎. 𝟐𝟓 ∗ (𝟏𝟎% − (−𝟐. 𝟐𝟓%)) + 𝟎. 𝟑𝟎 ∗
𝟐 𝟐 𝟐
(𝟎% − (−𝟐. 𝟐𝟓%)) + 𝟎. 𝟐𝟓 ∗ (−𝟏𝟓% − (−𝟐. 𝟐𝟓%)) + 𝟎. 𝟏𝟎 ∗ (−𝟑𝟎% − (−𝟐. 𝟐𝟓%)) =
𝟎. 𝟎𝟐𝟎𝟔𝟏𝟗
Std. Dev.=14.36%

Question 4: In the absence of probabilities (Assuming all cases equally likely), what the
standard deviation of returns.

a) 1% to 5%
b) 5% to 10%
c) 10% to 15%
d) 15% to 20%
e) None of the all

𝟏 𝟐 𝟐 𝟐
Hint: Variance = 𝟓 ∗ [(𝟐𝟎% − (−𝟐. 𝟐𝟓%)) + (𝟏𝟎% − (−𝟐. 𝟐𝟓%)) + (𝟎% − (−𝟐. 𝟐𝟓%)) +
𝟐 𝟐
(−𝟏𝟓% − (−𝟐. 𝟐𝟓%)) + (−𝟑𝟎% − (−𝟐. 𝟐𝟓%)) ] = 𝟎. 𝟎𝟑𝟏𝟔𝟓𝟔

Std. Dev.=17.79%
Question 5-7:

Question 5: Current price of a stock is Rs 60 with a daily standard deviation of 2%. On average
what is the expected amplitude of stock price movement

a) 58.8 – 61.2
b) 58.2 – 61.8
c) 57.8 -60.2
d) 59.8 – 62.2

Hint: P0=60, Daily SD= 2%, On average the stock can move up and down by 2% , that is 1.2 so
the amplitude is 58.8 to 61.2.

Question 6: Assume that returns follow normal distribution with a mean of zero (0). What is the
95% confidence (Z=1.96) interval for daily prices. [Current price= Rs 60 and SD=2%].

a) 57.65-62.35
b) 56.65- 61.35
c) 57.35-63.65
d) 58.65-63.35

Hint: P0=60, Daily SD= 2%, 95% confidence interval of returns = ± 1.96*2=± 3.92%. The
amplitude of price movement in 60*(1-3.92%) to 60*(1+3.92%) or 57.65 to 62.35.

Question 7: Assume that returns follow normal distribution with a mean of zero (0). What is the
99% confidence (Z=2.58) interval for daily prices. [Current price= Rs 60 and SD=2%]

a) 56.90-63.10
b) 57.90-64.10
c) 55.90-62.10
d) 59.90- 64.10

Hint: P0=60, Daily SD= 2%, 99% confidence interval of returns = ± 2.58*2=± 5.16%. The
amplitude of price movement in 60*(1-5.16%) to 60*(1+5.16%) or 56.90 to 63.10.
Question 8: Which of the following is correct if the two events are mutually exclusive?

a) P(A U B)= P(A)+P(B)-P(A∩B)


b) P(A U B)= P(A)+P(B)+P(A∩B)
c) P(A U B)= P(A)+P(B)
d) P(A U B)= P(A)-P(B)

Hint: If two events are mutually exclusive then P(A ∩ B)= 0. Then P(A U B)= P(A)+P(B)

Question 9: When two events do not occur simultaneously; they are:

a) Joint Events
b) Independent Events
c) Mutually Exclusive Events
d) Complement Events
e) None the all

Hint: Then they are mutually exclusive. There is no common overlapping occurrence.

Question 10: Which of the following distributions has a bell-shaped curve?

a) Normal Distribution
b) Poison Distribution
c) Binomial distribution
d) Uniform Distribution
e) None of these

Hint: Normal distribution has a bell-shaped curve.

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