Statistics and Econometrics I

Midterm Exam

September 23, 2018

Write your name eligibly please _________________________

Please read the instructions carefully:

• You have 80 minutes for the exam

• There are 8 problems, 10 points for each (80 points is max)

• Please read each question carefully twice

• Do not make stupid mistakes

• Please write eligibly, zero points for answers I cannot read

• Do not provide multiple different answers for the same question

• Partial credit might be granted for incomplete/incorrect answers

• You ARE allowed to use cheat sheet

• You ARE NOT allowed to use any other materials or devices

• You cannot use or copy from other student cheat sheets

• Cheating or any other dishonest behavior will be punished by ZERO points for the
exam

• GOOD LUCK!!!

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Problem 1 (10 points)

You and your friend solve Economics “True of False” questions. You provide a correct answer
with probability 90%. Your friend is not as smart as you so he/she provides only 80% of
correct answers. Assume that the events “Your answer is correct” and “Friend’s answer is
correct” (for the same question) are statistically independent.
a. What is the probability that both of you are right when you and your friend answer
the same question?
b. What is the probability that at least one of you is right when you and your friend
answer the same question?
c. What is the probability that both of you are wrong when answering the same question?
d. What is the conditional probability that your friend is right when you are wrong?
e. Suppose you and your friend have the same answer to particular question. What is
the probability that this answer is correct?

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Problem 2 (10 points)

NASA forms a team for the new mission to Mars. The potential candidates for the mission
include 10 pilots, 8 engineers, and 12 scientists. Every pilot, engineer, and scientist has equal
chance to be selected for the mission.
a. Suppose NASA has to choose first and second pilot. How many such teams are
possible?
b. How many combinations of two engineers are possible?
c. NASA decides that the mission will include two pilots (first and second), two engineers
and two scientists. How many different teams are possible?
d. Suppose that there are two Ukrainians among candidates: one engineer and one
scientist. What is the probability that both of them will fly to Mars?

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Problem 3 (10 points)

Suppose bank clients can be divided into two groups: low risk and high risk. A low-risk client
defaults with probability 2% within a year, and repays debt in full otherwise. Similarly, high-
risk clients default with probability 8% within a year. Suppose 80% of the clients are low
risk.
a. What is the probability that a random client defaults?
b. If a client defaults, what is the posterior probability she is a low-risk client?
c. What is the probability that such a customer (who defaulted during the first year)
defaults again next period?
d. If a customer defaults three times in first three years, what is the probability this
customer is a low-risk client?

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Problem 4 (10 points)

Suppose a continuous random variable X has the following probability density function:

 1

if x ∈ [−a, a]
2
fX (x) =

 0 otherwise

a. Find a.
b. Please derive the cumulative distribution function.
c. What is the probability that X is between −1.5 and −0.5?
d. Find the mean of X.
e. Find the standard deviation of X.

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Problem 5 (10 points)

Suppose return on gold and return on oil are jointly distributed as shown in the table:

Return on Gold
-5% 5%
-10% 0.1 0.3
Return on Oil
10% 0.3 0.3

a. Find the conditional probability of positive return on gold if return on oil is negative.
b. Which investment is more profitable, i.e., what asset has higher expected return? Show
or expain.
c. What is the standard deviation of return on oil?
d. Find the conditional expected return on oil if return on gold is positive.
e. What is the covariance between return on gold and return on oil?

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Problem 6 (10 points)

Using definitions and properties of covariance and expectation please prove that

cov(a + kX, Y ) = k · cov(X, Y )

where X and Y are some random variables, a and k are some parameters. To get the
maximum amount of points show or explain all the steps.

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Problem 7 (10 points)

Suppose your portfolio consists of two stocks A, two stocks B and $100 in cash. Prices of
stock A and stock B are random variables with means $100 and $200, and with standard
deviations $20 and $25.
a. What is the expected value of your portfolio?
b. Suppose prices of A and B are uncorrelated. What is the standard deviation of your
portfolio?
c. Suppose ρAB = −0.5, i.e., the correlation between prices of A and B equals -0.5. What
is the standard deviation of your portfolio?

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Problem 8 (10 points)

Suppose that there is 10% chance that Ukraine defaults in a given year and 90% chance that
Ukraine does not default.
a. What is the probability that Ukraine defaults twice during next 10 years?
b. What is the probability that Ukraine defaults at least once during next four years?
c. What is the expected number of defaults in the next 10 years?

d. Now assume that Ukraine can default multiple times per year. In other words, number
of defafults per year is no longer a zero or one variable. However, the expected number of
defaults in 10 years is the same as you derived in c. Pleases briefly explain what distribution(s)
as well as what parameter(s) you are going to use to compute probabilities.
e. Continuing question d, what it the probability of 2 defaults during 10 years?
f. What is the probability that the country defaults in less than 2.5 years?

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Extra Page

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