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Sampling Distribution Assignment Help

This document discusses sampling distributions and Bayesian analysis of normal distributions. It contains 4 examples: 1) Quantile-quantile plots are used to identify 4 distributions from random samples. 2) Stock betas from the S&P 500 are examined. A histogram and normal Q-Q plot show the data are consistent with a normal distribution, though the extremes differ slightly. 3) For a stock with beta of 1.6, a Bayesian analysis is done assuming a normal prior and likelihood. 4) The posterior distribution for the stock's true beta is normal, with mean a weighted average of the prior and observation, and variance less than the prior.

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30 views

Sampling Distribution Assignment Help

This document discusses sampling distributions and Bayesian analysis of normal distributions. It contains 4 examples: 1) Quantile-quantile plots are used to identify 4 distributions from random samples. 2) Stock betas from the S&P 500 are examined. A histogram and normal Q-Q plot show the data are consistent with a normal distribution, though the extremes differ slightly. 3) For a stock with beta of 1.6, a Bayesian analysis is done assuming a normal prior and likelihood. 4) The posterior distribution for the stock's true beta is normal, with mean a weighted average of the prior and observation, and variance less than the prior.

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Sampling Distribution Assignment Help


1. Probability Plots

Random samples of size n = 100 were simulated from four


distributions:

• Uniform(0, 1)
• Exponential(1)
• Normal(50, 10)
• Student’s t (4 degrees of freedom).

The quantile-quantile plots are plotted for each of these 4 samples:

Uniform QQ Plot Normal QQ Plot


Exponential QQ Plot t Dist. QQ Plot

For each sample, the values were re-scaled to have sample mean
zero and sample standard deviation 1

The Normal QQ plot for each set of standardized sample values is


given in the next display but they are in a random order. For each
distribution, identify the corresponding Normal QQ plot, and explain
your reasoning.
• Uniform(0, 1) = Plot
• Exponential(1) = Plot
• Normal(50, 10) = Plot
• Student’s t (4 degrees of freedom) = Plot
Solution:

The Student’s t sample has two extreme high values and one
extreme low value which are evident in Plot A, so

Plot A = t distribution

Plot B is the only plot that has a bow shape which indicates larger
observations are higher than would be expected for a normal
sample and smaller observations are less small than would be
expected for a normal sample. This is true for the Exponential
distribution which is asymmetric with a right-tail that is heavier
than a normal distribution.

Plot B = Exponential.

The Uniform(0, 1) sample has true mean 0.5 and true variance
equal to E[X2] − (E[X])2 = 1/3 − (1/2)2 = 1/12. For a typical sample,
the standardized sample values will be bounded (using the true
mean and standa d rd deviation to standardize, the values would no
larger than +(1 − .5)/ 1/12 = 1.73). For Plot C the range of the
standardized values is smallest, consistent with what would be
expected for a sample from a uniform distribution.

Plot C = Uniform distribution.


The QQ Plot for the normal distribution is unchanged and follows a
straight-line pattern indicating consistency of the ordered
observations with the theoretical quantiles – distribution

Plot D = Normal

2. Betas for Stocks

In S&P 500 Index. In financial modeling of stock returns, the Capital


Asset Pricing Model associates a “Beta” for any stock which
measures how risky that stock is compared to the “market
portfolio”. (Note: this name has nothing to do with the beta(a,b)
distribution!) Using monthly data, the Beta for each stock in the
S&P 500 Index was computed. The following display gives an index
plot, histogram, Normal QQ plot for these Beta values.

Index Plot of 500 Stock Betas (X)


Histogram

Normal Q−Q Plot

For the sample of 500 Beta values, x =1.0902 and sx =0.5053.

(a). On the basis of the histogram and the Normal QQ plot, are the
values consistent with being a random sample from a Normal
distribution?
Solution:

Yes, the values are consistent with being a random sample from a
Normal distribution. The normal QQ-plot is quite straight.

(b). Refine your answer to (a) focusing separately on the extreme


low values (smallest quantiles) and on the extreme large values
(highest quantiles).

Solution:

Consider the extremes of the distribution. The high positive points


appear a bit higher than would be expected for a normal sample
suggesting there are some outlier stocks with higher betas than
would be expected under a normal model. The lowest values near
zero appear a bit above the straight line through most of the
ordered points, suggesting that the stocks with lowest beta values
aren’t as low as might be expected under a normal model.

Bayesian Analysis of a Normal Distribution.

For a stock that is similar to those that are constituents of the S&P
500 index above, let X = 1.6 be an estimate of the Beta coefficient θ.
Suppose that the following assumptions are reasonable:
• The conditional distribution X given θ is Normal with known
variance:

• As a prior for θ, assume that θ is Normal with mean and variance


equal to those in the sample

(c). Determine the posterior distribution of θ given X = 1.6.

Solution:
This is the case of a normal conjugate prior distribution for the
normal sample observation. The posterior distribution of θ is given
by

where

and
Plugging in values we get

(d). Is the posterior mean between X and µprior? Would this


always be the case if a different value of X had been observed?

(e). Is the variance of the posterior distribution for θ given X


greater or less than the variance of the prior distribution for θ?
Does your answer depend on the value of X?

Solution:

(d). Yes, the posterior mean is a weighted average of X and µprior


which will always be between the two values.

(e). The variance of the posterior distribution τ 2 = (0.186)2 ∗ is


less than (.5053)2 = σ2 prior. From part (c), the posterior variance
does not vary with the outcome X = x

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