Combine Problem set 3

1. The theory of finance allows for the computation of “excess” returns, either above or
below the current stock market average. An analyst wants to determine whether
stocks in a certain industry group earn either above or below the market average at a
certain time period. The null hypothesis is that there are no excess returns, on the
average, in the industry in question. “No average excess returns” means that the
population excess return for the industry is zero. A random sample of 24 stocks in the
industry reveals a sample average excess return of 0.12 and sample standard deviation
of 0.2. State the null and alternative hypotheses and carry out the test at 0.05 level of
significance.

2. The unemployment rate in Britain during a certain period was believed to have been
11%. At the end of the period in question, the government embarked on a series of
projects to reduce unemployment. The government was interested in determining
whether the average unemployment rate in the country had decreased as a result of
these projects, or whether previously employed people were the ones hired for the
project jobs, while the unemployed remained unemployed. A random sample of 3,500
people was chosen, and 421 were found to be unemployed. Do you believe that the
government projects reduced the unemployment rate?

3. According to a survey published in the Financial Times, 56% of executives at

Britain’s top 500 companies are less willing than they had been five years ago to
sacrifice their family lifestyle for their career. If the survey consisted of a random
sample of 40 executives, give a 95% confidence interval for the proportion of
executives less willing to sacrifice their family lifestyle.

4. Shimano mountain bikes are displayed in chic clothing boutiques in Milan, Italy, and
the average price for the bike in the city is $700. Suppose that the standard deviation
of bike prices is $100. If a random sample of 60 boutiques is selected, what is the
probability that the average price for a Shimano mountain bike in this sample will be
between $680 and $720?

5. Recently, the federal government claimed that the state of Alaska had overpaid 20%
of the Medicare recipients in the state. The director of the Alaska Department of
Health and Social Services planned to check this claim by selecting a random sample
of 250 recipients of Medicare checks in the state and determining the number of
overpaid cases in the sample. Assuming the federal government’s claim is correct,
what is the probability that less than 15% of the people in the sample will be found to
have been overpaid?

6. Pierre operates a currency exchange office at Orly Airport in Paris. His office is open
at night when the airport bank is closed, and he makes most of his business on
returning U.S. tourists who need to change their remaining euros back to U.S. dollars.
 From experience, Pierre knows that the demand for dollars on any given night during
high season is approximately normally distributed with mean $25,000 and standard
deviation $5,000. If Pierre carries too much cash in dollars overnight, he pays a
penalty: interest on the cash. On the other hand, if he runs short of cash during the
night, he needs to send a person downtown to an all-night financial agency to get the
required cash. This, too, is costly to him. Therefore, Pierre would like to carry
overnight an amount of money such that the demand on 85% of the nights will not
exceed this amount. Can you help Pierre find the required amount of
dollars to carry?

7. According to the New York Times, the Martha Stewart Living Omnimedia Company
concentrates mostly on food.10 An analyst wants to disprove a claim that 60% of the
company’s public statements have been related to food products in favor of a left-
tailed alternative. A random sample of 60 public statements revealed that only 21
related to food. Conduct the test and provide a p-value.

8. Management of an airline knows that 0.5% of the airline’s passengers lose their
luggage on domestic flights. Management also knows that the average value claimed
for a lost piece of luggage on domestic flights is $600. The company is considering
increasing fares by an appropriate amount to cover expected compensation to
passengers who lose their luggage. By how much should the airline increase fares?
Why? Explain, using the ideas of a random variable and its expectation.

9. The probability density of the random variable Z is given by

Then, find k and draw the graph of this probability density.

10. If the joint probability distribution of X and Y is given by

construct a table showing the values of the joint distribution function of the two random
variables at the 12 points i.e. (0, 0), (0, 1), . . . , (3, 2).