Exercise Solutions Chapter 2

Introduction
to Econometrics
(3rd Updated Edition, Global Edition)

by

James H. Stock and Mark W. Watson

Solutions to End‐of‐Chapter Exercises: Chapter 2*

(This version August 17, 2014)

*Limited distribution: For Instructors Only. Answers to all odd‐numbered
questions are provided to students on the textbook website. If you find errors in
the solutions, please pass them along to us at mwatson@princeton.edu.
©2015 Pearson Education, Ltd.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 2 1
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2.1. (a) Probability distribution function for Y
Outcome (number of heads) Y=0 Y=1 Y=2
Probability 0.36 0.48 0.16
(b) Y = E (Y )  (0  0.36)  (1 0.48)  (2  0.16)  0.8. F  Fq, .

d
Using Key Concept 2.3: var(Y )  E (Y 2 )  [ E (Y )]2 ,
and
E (Y 2 )   Y 2  Y 2  2  0.6  0.4  0.82  1.12
so that
var(Y )  E (Y 2 )  [ E (Y )]2  1.12  0.82  0.48.

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2.2. We know from Table 2.2 that Pr (Y  0)  022, Pr (Y  1)  078, Pr ( X  0)  030,

Pr ( X  1)  070. So
(a)
Y  E (Y )  0  Pr (Y  0)  1 Pr (Y  1)
 0  022  1 078  078,
 X  E ( X )  0  Pr ( X  0)  1 Pr ( X  1)
 0  030  1 070  070
(b)
 X2  E[( X   X )2 ]
 (0  0.70) 2  Pr ( X  0)  (1  0.70) 2  Pr ( X  1)
 (070) 2  030  0302  070  021
 Y2  E[(Y  Y ) 2 ]
 (0  0.78) 2  Pr (Y  0)  (1  0.78) 2  Pr (Y  1)
 (078) 2  022  0222  078  01716
(c)
 XY  cov (X , Y )  E[( X   X )(Y  Y )]
 (0  0.70)(0  0.78) Pr( X  0, Y  0)
 (0  070)(1  078) Pr ( X  0 Y  1)
 (1  070)(0  078) Pr ( X  1 Y  0)
 (1  070)(1  078) Pr ( X  1 Y  1)
 (070)  (078)  015  (070)  022  015
 030  (078)  007  030  022  063
 0084,
 XY 0084
corr (X , Y )    04425
 XY 021 01716

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2.3. For the two new random variables W  4  8 X and V  11  2Y , we have:
(a)
E (V )  E (11  2Y )  11  2 E (Y )  11  2  078  944,
E (W )  E (4  8 X )  4  8E ( X )  4  8  070  96
(b)
 W2  var (4  8 X )  82  X2  64  021  1344,

 V2  var (11  2Y )  (2)2  Y2  4  01716  06864
(c)
 WV  cov (4  8 X , 11  2Y )  6  ( 2) cov (X , Y )  12  0084  1008
 WV 1008
corr (W , V )    03319
WV 1344  06864

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2.4. (a) E ( X 3 )  03  (1  p)  13  p  p
(b) E ( X k )  0k  (1  p)  1k  p  p
(c) E ( X )  0.3
var ( X )  E ( X 2 )  [ E ( X )]2  0.3  0.09  0.21
Thus,   0.21  0.46.
To compute the skewness, use the formula from exercise 2.21:
E ( X   )3  E ( X 3 )  3[ E ( X 2 )][ E ( X )]  2[ E ( X )]3
 0.3  3  0.32  2  0.33  0.084
Alternatively, E ( X   )3 = [(1  0.3)3  0.3]  [(0  0.3)3  0.7]  0.084
Thus, skewness  E ( X   )3/ 3  .084/0.463  0.87.
To compute the kurtosis, use the formula from exercise 2.21:
E ( X   )4  E ( X 4 )  4[ E ( X )][ E ( X 3 )]  6[ E ( X )]2 [ E ( X 2 )]  3[ E ( X )]4

 0.3  4  0.32  6  0.33  3  0.34  0.0777
Alternatively, E ( X   ) 4 = [(1  0.3) 4  0.3]  [(0  0.3) 4  0.7]  0.0777
Thus, kurtosis is E ( X   )4/ 4 = .0777/0.464  1.76

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2.5. Let X denote temperature in F and Y denote temperature in C. Recall that Y = 0
when X = 32 and Y =100 when X = 212.
This implies Y  (100/180)  ( X  32) or Y  17.78  (5/9)  X.
Using Key Concept 2.3, X = 65oF implies that  x  17.78  (5/9)  63  18.33C,
and x = 5oF implies  x  (5/9)  5  2.78C.

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2.6. The table shows that Pr ( X  0, Y  0)  0078, Pr ( X  0, Y  1)  0673,

Pr ( X  1, Y  0)  0042, Pr ( X  1, Y  1)  0207, Pr ( X  0)  0751,
Pr ( X  1)  0249, Pr (Y  0)  012, Pr (Y  1)  088.
(a)
E (Y )  Y  0  Pr(Y  0)  1 Pr (Y  1)
 0  012  1 088  088
(b)
#(unemployed)
Unemployment Rate   Pr (Y  0)  0.12
#(labor force)
(c) Calculate the conditional probabilities first:
Pr ( X  0, Y  0) 0078
Pr (Y  0|X  0)    0104,
Pr ( X  0) 0751
Pr ( X  0, Y  1) 0673
Pr (Y  1|X  0)    0896,
Pr ( X  0) 0751
Pr ( X  1, Y  0) 0042
Pr (Y  0|X  1)    0169,
Pr ( X  1) 0249
Pr ( X  1, Y  1) 0207
Pr (Y  1|X  1)    0831
Pr ( X  1) 0249
The conditional expectations are

E (Y |X  1)  0  Pr (Y  0|X  1)  1 Pr (Y  1|X  1)
 0  1 0831  0831
E (Y |X  0)  0  Pr (Y  0|X  0)  1 Pr (Y  1|X  0)
 0  1 0896  0896

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(d) Use the solution to part (c),

Unemployment rate for college graduates = 1 – E(Y | X = 1) = 1 − 0.831 = 0.169
Unemployment rate for non-college graduates = 1 – E(Y | X = 0) = 1 − 0.896 =
0.104
(e) The probability that a randomly selected worker, who is reported being
unemployed, is a college graduate is
Pr ( X  1, Y  0) 0042
Pr ( X  1|Y  0)    035
Pr (Y  0) 012
The probability that this worker is a non-college graduate is

Pr ( X  0|Y  0)  1  Pr ( X  1|Y  0)  1  035  065
(f) Educational achievement and employment status are not independent because
they do not satisfy that, for all values of x and y,
Pr ( X  x|Y  y )  Pr ( X  x)
For example, from part (e) Pr ( X  0|Y  0) = 0.65, while from the table
Pr(X = 0) = 0.751.

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2.7. Using obvious notation, C  M  F ; thus C  M   F and
 C2   M2   F2  2 cov ( M , F ). This implies
(a) C  50  48  $98, 000 per year.
cov( M , F )
(b) corr ( M , F )  MF , so that cov ( M , F )   M  F corr ( M , F ). Thus,
cov ( M , F )  15  13  0.9  175.50, where the units are squared thousands of

dollars per year.
(c)  C2   M2   F2  2 cov ( M , F ), so that  C2  152  132  2  175.5  745, and
 C  745  27.295 thousand dollars per year.
(d) First you need to look up the current Euro/dollar exchange rate in the Wall Street
Journal, the Federal Reserve web page, or other financial data outlet. Suppose that
this exchange rate is e (say e = 0.75 Euros per Dollar); each 1 dollar is therefore
with e Euros. The mean is therefore e  C (in units of thousands of Euros per
year), and the standard deviation is e  C (in units of thousands of Euros per
year). The correlation is unit-free, and is unchanged.

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2.8. E (Y )  4; var (Y )  1 9; Z  3(Y  4)
 Z  E (3(Y  4))  3( E (Y )  4)  3(4  4)  0

1
 Z2  9var(Y )  9   1
9

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2.9.
Probability
Value of Y
Distribution of
2 4 6 8 10 X
3 0.04 0.09 0.03 0.12 0.01 0.29
Value of X 6 0.10 0.06 0.15 0.03 0.02 0.36
9 0.13 0.11 0.04 0.06 0.01 0.35
Probability Distribution of Y 0.27 0.26 0.22 0.21 0.04 1.00

(a) The probability distribution is given in the table above.
E (Y )  2(0.27)  4(0.26)  6(0.22)  8(0.21)  10(0.04)  4.98
E (Y 2 )  2 2 (0.27)  4 2 (0.26)  6 2 (0.22)  82 (0.21)  10 2 (0.04)  30.6
var(Y )  E (Y 2 )  [ E (Y )]2  30.6  24.8  5.8
 Y  5.8  2.41

(b) The conditional probability of Y|X = 6 is given in the table below
Value of Y
2 4 6 8 10
0.10/0.36 0.06/0.36 0.15/0.36 0.03/0.36 0.02/0.36

E (Y| X  6)  2  (0.1/0.36)  4  (0.06/0.36)  6  (0.15/0.36)
 8  (0.03/0.36)  10  (0.02/0.36)  4.944
2 2 2 2
E (Y | X  6)  2  (0.1/0.36)  4  (0.06/0.36)  6  (0.15/0.36)
 82  (0.03/0.36)  102  (0.02/0.36)  29.667
var(Y )  E (Y 2 )  [ E (Y )]2  29.667  24.443  5.244

(c)
E ( XY )  (3  2  0.04)  (3  4  0.09)   (9 10  0.01)  29.4
cov( X , Y )  E ( XY )  E ( X ) E (Y )  29.4  6.18  4.98  1.3764
corr( X , Y )  cov( X , Y )/( X  Y )  1.3764 / (2.93  2.41)  0.1949

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Y  Y
2.10. Using the fact that if Y  N  Y ,  Y2  then ~ N (0,1) and Appendix Table 1,
Y
we have
Y 4 54  1
(a) Pr (Y  5)  Pr         06304
 3 3   3
Y 5 25  1 1
(b) Pr(Y  2)  1  Pr     1           05987
 4 4   4 4
 2 1 Y 1 5 1  1
(c) Pr (2  Y  5)  Pr       (2)      0.2857
 2 2 2  2
 1 2 Y  2 1 2 
(d) Pr (1  Y  4)  Pr       (2)   (1)
 1 1 1 
  (2)  (1  (1)  08185

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2.11. (a) 0.90

(b) 0.95
(c) 0.95
Y
(d) When Y ~ 82 , then ~ F8,
10
(e) Y  Z 2 , where Z ~ N (0,1), thus, Pr (Y  0.5)  Pr (0.5  Z  0.5)  0.383

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2.12. (a) 0.90

(b) 0.90
(c) 0.9108
(d) The tdf distribution and N(0, 1) approach each other only when N becomes large,
or the degrees of freedom become large.
(e) 0.95
(f) 0.01

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2.13. (a) E (Y 2 )  Var (Y )  Y2  4  0  4
E (W 2 )  Var (W )  W2  16  0  16
(b) Y and W are symmetric around 0, thus skewness is equal to 0; because their mean
is 0, which means that the third moment is 0.
E (Y  Y )4
(c) The kurtosis of the normal is 3, so 3  ; by transforming both Y and
 Y4
W to the standard normal yields the results.
(d) First, condition on X  0, so that S  W :
E ( S |X  0)  0; E ( S 2 |X  0)  16, E ( S 3 |X  0)  0, E ( S 4 |X  0)  3 162
Similarly,
E ( S |X  1)  0; E ( S 2 |X  1)  4, E ( S 3 |X  1)  0, E ( S 4 |X  1)  3  42
From the law of iterated expectations

E ( S )  E ( S |X  0)  Pr (X  0)  E ( S |X  1)  Pr( X  1)  0
E ( S 2 )  E ( S 2 |X  0)  Pr (X  0)  E ( S 2 |X  1)  Pr( X  1)  16  0.1  4  0.9  5.2
E ( S 3 )  E ( S 3 |X  0)  Pr (X  0)  E ( S 3 |X  1)  Pr( X  1)  0
E ( S 4 )  E ( S 4 |X  0)  Pr (X  0)  E ( S 4 |X  1)  Pr( X  1)
 3 162  0.1  3  42  0.9  120
(e) S  E ( S )  0, thus, E ( S   S )3  E ( S 3 )  0 from part (d). Thus, skewness = 0.
Similarly,  S2  E ( S   S ) 2  E ( S 2 )  5.2, and E ( S   S ) 4  E ( S 4 )  120. Thus,

kurtosis  120 / (5.22 )  4.44.

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2.14. The central limit theorem suggests that when the sample size (n) is large, the
 Y2
distribution of the sample average (Y ) is approximately N  Y ,  Y2  with  Y2  n .
Given Y  50,  Y2  21,
2
(a) n  50 and  Y2  nY  50
21
 042
 Y  50 51  50   Y  50 
Pr (Y  51)  Pr     Pr   1.5429    (1543)  09382
 042 042   042 
2
(b) n  150 and  Y2  nY  150
21
 014
Pr (Y  49)  1  Pr (Y  49
 Y  50 49  50 
 1  Pr   
 014 014 
 Y  50 1 
 1  Pr   
 014 0.3741 
 Y  50 
 1  Pr   2.6731  1   (26731)
 014 
  (26731)  09962
2
(c) n  45 and  Y2  nY  21
45  0467
Pr (50.5  Y  51)
 50.5  50 Y  50 51  50 
 Pr    
 0467 0467 0467 
  (14587)   (07293)  09265  07642
 01623

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2.15. (a)
 9.6  10 Y  10 10.4  10 
Pr (9.6  Y  10.4)  Pr    
 4/n 4/n 4/n 
 9.6  10 10.4  10 
 Pr  Z 
 4/n 4/n 
where Z ~ N(0, 1). Thus,
 9.6  10 10.4  10 
(i) n = 20; Pr  Z   Pr (0.89  Z  0.89)  0.63
 4/n 4/n 
 9.6  10 10.4  10 
(ii) n = 100; Pr  Z   Pr(2.00  Z  2.00)  0.954
 4/n 4/n 
 9.6  10 10.4  10 
(iii)n = 1000; Pr  Z   Pr(6.32  Z  6.32)  1.000
 4/n 4/n 
(b)
 c Y  10 c 
Pr (10  c  Y  10  c)  Pr    
 4/n 4/n 4/n 
 c c 
 Pr  Z .
 4/n 4/n 
c
As n get large gets large, and the probability converges to 1.
4/n
(c) This follows from (b) and the definition of convergence in probability given in
Key Concept 2.6.

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2.16. There are several ways to do this. Here is one way. Generate n draws of Y, Y1, Y2, …
Yn. Let Xi = 1 if Yi < 3.6, otherwise set Xi = 0. Notice that Xi is a Bernoulli random
variables with X = Pr(X = 1) = Pr(Y < 3.6). Compute X . Because X converges in
probability to X = Pr(X = 1) = Pr(Y < 3.6), X will be an accurate approximation if n

is large.

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2.17. Y = 0.6 and  Y2  0.4  0.6  0.24
(a) (i) P( Y  0.64) =

 Y  0.6 0.64  0.6   Y  0.6 
1  Pr     1  Pr   0.5773   0.72
 0.24/n 0.24/n   0.24/n 
 Y  0.6 0.56  0.6   Y  0.6 

(ii) P( Y  0.56) = Pr     Pr   1.154   0.12
 0.24/n 0.24/n   0.24/n 
b) We know Pr(−1.96  Z  1.96) = 0.95; thus, we want n to satisfy
0.65  0.60 0.56  0.60

0.61    1.96 and   1.96
0.24/n 0.24/n
Solving these inequalities yields n  368.

_____________________________________________________________________________________________________
2.18. Pr (Y  $0)  095, Pr (Y  $30, 000)  005
(a) The mean of Y is
Y  0  Pr (Y  $0)  30, 000  Pr (Y  530, 00)  $1,500
The variance of Y is
 Y2  E  Y  Y 
 2

 
 (0  1500) 2  Pr Y  50   (30000  1500)2  Pr (Y  $30000)

 (1500) 2  095  (28,500) 2  005
 427 107
1
so the standard deviation of Y is  Y  (427  107 ) 2  $6, 538.35
2 107
(b)  Y2  nY  4.27   355,833
120
Using the central limit theorem,
Pr (Y  3000)  1  Pr (Y  3000)
 Y  1500 3000  1500 
 1  Pr   
 355,833 355,833 
 1   (25145)  1  09939  0

_____________________________________________________________________________________________________
2.19. (a)
l
Pr (Y  y j )   Pr ( X  xi , Y  y j )
i 1
l
  Pr (Y  y j | X  xi )Pr ( X  xi )
i 1
(b)
k k l
E (Y )   y j Pr (Y  y j )   y j  Pr (Y  y j |X  xi ) Pr ( X  xi )
j 1 j 1 i 1
l  k 




 yj Pr (Y  yj |X  xi )  Pr ( X  xi )


i 1  j 1 
l
 E (Y | X  xi )Pr ( X  xi )
i 1
(c) When X and Y are independent,
Pr (X  xi , Y  y j )  Pr (X  xi )Pr (Y  y j )
so
 XY  E[( X   X )(Y  Y )]
l k
  ( xi  X )( y j Y ) Pr ( X  xi , Y  y j )
i 1 j 1
l k
 ( xi X )( y j Y ) Pr ( X  xi ) Pr (Y  y j )
i 1 j 1
 l  k 
   ( xi   X ) Pr ( X  xi )    ( yj  Y ) Pr (Y  yj 
 i 1   j 1 
 E ( X   X ) E (Y  Y )  0  0  0,
 XY 0
cor (X , Y )    0
 XY  XY

_____________________________________________________________________________________________________
l m
2.20. (a) Pr (Y  yi )   Pr (Y  yi | X  xj , Z  zh ) Pr (X  xj , Z  zh )
j 1 h 1
(b)
k
E (Y )   yi Pr (Y  yi ) Pr (Y  yi )
i 1
k l m
  yi  Pr (Y  yi | X  xj , Z  zh ) Pr (X  xj , Z  zh )
i 1 j 1 h 1
l m
 k 
    yi Pr (Y  yi | X  xj , Z  zh )  Pr (X  xj , Z  zh )
j 1 h 1  i 1 
l m
  E (Y | X  xj , Z  zh ) Pr (X  xj , Z  zh )
j 1 h 1
where the first line in the definition of the mean, the second uses (a), the third is a
rearrangement, and the final line uses the definition of the conditional
expectation.

_____________________________________________________________________________________________________
2. 21.
(a)
E ( X   )3  E[( X   ) 2 ( X   )]  E[ X 3  2 X 2   X  2  X 2   2 X  2   3 ]
 E ( X 3 )  3E ( X 2 )   3E ( X )  2   3
 E ( X 3 )  3E ( X 2 ) E ( X )  3E ( X )[ E ( X )]2  [ E ( X )]3
 E ( X 3 )  3E ( X 2 ) E ( X )  2 E ( X )3
(b)
E ( X   ) 4  E[( X 3  3 X 2   3 X  2   3 )( X   )]
 E[ X 4  3 X 3   3 X 2  2  X  3  X 3   3 X 2  2  3 X  3   4 ]
 E ( X 4 )  4 E ( X 3 ) E ( X )  6 E ( X 2 ) E ( X ) 2  4 E ( X ) E ( X )3  E ( X ) 4
 E ( X 4 )  4[ E ( X )][ E ( X 3 )]  6[ E ( X )]2 [ E ( X 2 )]  3[ E ( X )]4

_____________________________________________________________________________________________________
2. 22. The mean and variance of R are given by
  w  0.08  (1  w)  0.05
 2  w2  0.072  (1  w)2  0.042  2  w  (1  w)  [0.07  0.04  0.25]
where 0.07  0.04  0.25  Cov ( Rs , Rb ) follows from the definition of the correlation
between Rs and Rb.
(a)   0.065;   0.044
(b)   0.0725;   0.056
(c) w = 1 maximizes  ;   0.07 for this value of w.
(d) The derivative of 2 with respect to w is
d 2
 2 w  .07 2  2(1  w)  0.042  (2  4 w)  [0.07  0.04  0.25]
dw
 0.0102 w  0.0018
Solving for w yields w  18 / 102  0.18. (Notice that the second derivative is
positive, so that this is the global minimum.) With w  0.18,  R  .038.

_____________________________________________________________________________________________________
2. 23. X and Z are two independently distributed standard normal random variables, so
 X   Z  0,  X2   Z2  1,  XZ  0.
(a) Because of the independence between X and Z , Pr ( Z  z| X  x)  Pr ( Z  z ),

and E ( Z |X )  E ( Z )  0. Thus
E (Y | X )  E ( X 2  Z| X )  E ( X 2| X )  E ( Z |X )  X 2  0  X 2 
(b) E ( X 2 )   X2   X2  1, and Y  E ( X 2  Z )  E ( X 2 )   Z  1  0  1
(c) E ( XY )  E ( X 3  ZX )  E ( X 3 )  E ( ZX ). Using the fact that the odd moments of

a standard normal random variable are all zero, we have E ( X 3 )  0. Using the
independence between X and Z , we have E ( ZX )   Z  X  0. Thus
E ( XY )  E ( X 3 )  E ( ZX )  0.
(d)
cov (XY )  E[( X   X )(Y  Y )]  E[( X  0)(Y  1)]

 E ( XY  X )  E ( XY )  E ( X )
 0  0  0
 XY 0
corr (X , Y )    0
 XY  XY

_____________________________________________________________________________________________________
2.24. (a) E (Yi 2 )   2   2   2 and the result follows directly.
(b) (Yi/) is distributed i.i.d. N(0,1), W   i 1 (Yi / ) 2 , and the result follows from the
n
definition of a  n2 random variable.
n
Yi 2 n
Yi 2
(c) E (W )  E   E  n.
i 1 2 i 1 2
(d) Write
Y1 Y1 /
V 
in2 Yi 2 in2 (Y / ) 2
n 1 n 1
which follows from dividing the numerator and denominator by . Y1/ ~ N(0,1),
 i  2 (Yi / ) 2 ~  n21 , and Y1/ and  i  2 (Yi / ) 2 are independent. The result then
n n
follows from the definition of the t distribution.

_____________________________________________________________________________________________________
n n
2.25. (a)  ax
i 1
i  (ax1  ax2  ax3    axn )  a( x1  x2  x3    xn )  a xi
i 1
(b)
n
 (x  y )  (x  y
i 1
i i 1 1  x2  y2   xn  yn )
 ( x1  x2   xn )  ( y1  y2   yn )
n n
  xi   yi
i 1 i 1
n
(c)  a  (a  a  a    a)  na
i 1
(d)
n n
 (a  bxi  cyi )2   (a 2  b2 xi2  c 2 yi2  2abxi  2acyi  2bcxi yi )

i 1 i 1
n n n n n
 na 2  b 2  xi2  c 2  yi2  2ab xi  2ac  yi  2bc  xi yi
i 1 i 1 i 1 i 1 i 1

_____________________________________________________________________________________________________
cov(Yi , Y j ) cov(Yi , Y j ) cov(Yi , Y j )

2.26. (a) corr(Yi,Yj) =     , where the first equality
Y Y i j
 Y Y  Y2
uses the definition of correlation, the second uses the fact that Yi and Yj have the same
variance (and standard deviation), the third equality uses the definition of standard
deviation, and the fourth uses the correlation given in the problem. Solving for
cov(Yi, Yj) from the last equality gives the desired result.
1 1 1 1
(b) Y  Y1  Y2 , so that E( Y ) = E (Y )1  E (Y2 )  Y
2 2 2 2
1 1 2  2  Y2
var( Y ) = var(Y1 )  var(Y2 )  cov(Y1 , Y2 )  Y 
4 4 4 2 2
1 n 1 n 1 n
(c) Y  i
n i 1
Y , so that E (Y )   i n
n i 1
E (Y ) 
i 1
Y  Y
1 n 
var(Y )  var   Yi 
 n i 1 
1 n 2 n 1 n
 2  var(Yi )  2   cov(Y , Y ) i j
n i 1 n i 1 j i 1
1 n
2 n 1 n

n2

i 1
2
Y 
n2
  
i 1 j i 1
2
Y
 2
n(n  1)
 Y
  Y2
n n2
 Y2  1  2
  1    Y
n  n
n 1 n
an(n  1)
where the fourth line uses   a  a(1  2  3    n  1) 
i 1 j  i 1 2
for any
variable a.
 Y2 1
(d) When n is large  0 and  0 , and the result follows from (c).
n n

_____________________________________________________________________________________________________
2.27
(a) E(W) = E[E(W|Z) ] = E[E(X− )|Z] = E[ E(X|Z) – E(X|Z) ] = 0.
(b) E(WZ) = E[E(WZ|Z) ] = E[ZE(W)|Z] = E[ Z×0] = 0
(c) Using the hint: V = W – h(Z), so that E(V2) = E(W2) + E[h(Z)2] – 2×E[W×h(Z)].
Using an argument like that in (b), E[W×h(Z)] = 0. Thus, E(V2) = E(W2) +
E[h(Z)2], and the result follows by recognizing that E[h(Z)2] ≥ 0 because h(z)2 ≥ 0
for any value of z.

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Introduction

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(b) Y = E (Y )  (0  0.36)  (1 0.48)  (2  0.16)  0.8. F  Fq, .

Using Key Concept 2.3: var(Y )  E (Y 2 )  [ E (Y )]2 ,

E (Y 2 )   Y 2  Y 2  2  0.6  0.4  0.82  1.12

var(Y )  E (Y 2 )  [ E (Y )]2  1.12  0.82  0.48.

©2015 Pearson Education, Ltd.

2.2. We know from Table 2.2 that Pr (Y  0)  022, Pr (Y  1)  078, Pr ( X  0)  030,

©2015 Pearson Education, Ltd.

2.3. For the two new random variables W  4  8 X and V  11  2Y , we have:

 W2  var (4  8 X )  82  X2  64  021  1344,

 WV  cov (4  8 X , 11  2Y )  6  ( 2) cov (X , Y )  12  0084  1008

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var ( X )  E ( X 2 )  [ E ( X )]2  0.3  0.09  0.21

Thus,   0.21  0.46.

To compute the skewness, use the formula from exercise 2.21:

Alternatively, E ( X   )3 = [(1  0.3)3  0.3]  [(0  0.3)3  0.7]  0.084

Thus, skewness  E ( X   )3/ 3  .084/0.463  0.87.

To compute the kurtosis, use the formula from exercise 2.21:

E ( X   )4  E ( X 4 )  4[ E ( X )][ E ( X 3 )]  6[ E ( X )]2 [ E ( X 2 )]  3[ E ( X )]4

Alternatively, E ( X   ) 4 = [(1  0.3) 4  0.3]  [(0  0.3) 4  0.7]  0.0777

Thus, kurtosis is E ( X   )4/ 4 = .0777/0.464  1.76

©2015 Pearson Education, Ltd.

This implies Y  (100/180)  ( X  32) or Y  17.78  (5/9)  X.

and x = 5oF implies  x  (5/9)  5  2.78C.

©2015 Pearson Education, Ltd.

2.6. The table shows that Pr ( X  0, Y  0)  0078, Pr ( X  0, Y  1)  0673,

(c) Calculate the conditional probabilities first:

The conditional expectations are

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(d) Use the solution to part (c),

The probability that this worker is a non-college graduate is

©2015 Pearson Education, Ltd.

2.7. Using obvious notation, C  M  F ; thus C  M   F and

 C2   M2   F2  2 cov ( M , F ). This implies

(a) C  50  48  $98, 000 per year.

cov ( M , F )  15  13  0.9  175.50, where the units are squared thousands of

(c)  C2   M2   F2  2 cov ( M , F ), so that  C2  152  132  2  175.5  745, and

 C  745  27.295 thousand dollars per year.

©2015 Pearson Education, Ltd.

2.8. E (Y )  4; var (Y )  1 9; Z  3(Y  4)

 Z  E (3(Y  4))  3( E (Y )  4)  3(4  4)  0

©2015 Pearson Education, Ltd.

©2015 Pearson Education, Ltd.

  (2)  (1  (1)  08185

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2.11. (a) 0.90

(e) Y  Z 2 , where Z ~ N (0,1), thus, Pr (Y  0.5)  Pr (0.5  Z  0.5)  0.383

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2.12. (a) 0.90

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2.13. (a) E (Y 2 )  Var (Y )  Y2  4  0  4

(d) First, condition on X  0, so that S  W :

From the law of iterated expectations

E ( S 2 )  E ( S 2 |X  0)  Pr (X  0)  E ( S 2 |X  1)  Pr( X  1)  16  0.1  4  0.9  5.2

(e) S  E ( S )  0, thus, E ( S   S )3  E ( S 3 )  0 from part (d). Thus, skewness = 0.

Similarly,  S2  E ( S   S ) 2  E ( S 2 )  5.2, and E ( S   S ) 4  E ( S 4 )  120. Thus,

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Given Y  50,  Y2  21,

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where Z ~ N(0, 1). Thus,

©2015 Pearson Education, Ltd.

probability to X = Pr(X = 1) = Pr(Y < 3.6), X will be an accurate approximation if n