Members: PHAM NGOC MINH THUY – BAFNIU19034

PHAM DANG KHOA – BAFNIU19015

Course: Quantitative Methods for Finance

ASSIGNMENT 2

Exercise 2.5
The systolic blood pressure of male adults is normally distributed with a mean of 127.7
and a standard deviation of 19.2.
(a) Specify an interval in which the blood pressures of approximately 68% of the adult
male population fall.
According to the Empirical Rule:
68.27%:   1  127.7  19.2 = [108.5 ; 146.9]

(b) Specify an interval in which the blood pressures of approximately 95% of the adult
male population fall.
95.45%:   2  127.7  (2 x 19.2) = [89.3 ; 166.1]

(c) Specify an interval in which the blood pressures of approximately 99.7% of the
adult male population fall.
99.73%:   3  127.7  (3 x 19.2) = [70.1 ; 185.3]

Exercise 2.6
Suppose that the amount of time that a certain battery functions is a normal random
variable with mean 400 hours and standard deviation 50 hours. Suppose that an individual
owns two such batteries, one of which is to be used as a spare to replace the other when
it fails.
(a) What is the probability that the total life of the batteries will exceed 760 hours?
X: the amount of time of a certain battery
  = 400 ;  = 50

X1 + X2: the amount of time of two batteries

  = 400 + 400 = 800
 2 = 502 + 502 = 5000
  = 50√ 2
760−800
 P (X1 + X2 > 760) = P (Z > ) = P(Z > -0.565) = P(Z  0.565) = 0.7123
50 √ 2

(b) What is the probability that the second battery will outlive the first by at least 25
hours?
X2 – X1: the amount of time that the second battery will outlive the first
  = 400 - 400 = 0
  = 50√ 2
25−0
 P (X2 – X1 > 25) = P (Z > ) = P(Z > 0.353) = 1 - P(Z  0.353) = 1 – 0.6368 = 0.3632
50 √ 2
 (c) What is the probability that the longer-lasting battery will outlive the other by at
least 25 hours?
P (| X1 - X2 | > 25) = 2P (X2 – X1 > 25) = 2 x 0.3632 = 0.7264

Exercise 2.7
The time it takes to develop a photographic print is a random variable with mean 18
seconds and standard deviation 1 second. Approximate the probability that the total
amount of time that it takes to process 100 prints is
(a) more than 1710 seconds
X: the amount of time to develop a photographic print
  = 18 ;  = 1

100X: the amount of time to develop 100 prints

  = 18 x 100 = 1800
 2 = 12 x 100 = 100
  = 10
1710−1800
 P (100X > 1710) = P (Z > ) = P (Z > -9) = P (Z  9) =
10

(b) between 1690 and 1710 seconds

1690−1800 1710−1800
P ( 1690 < 100X < 1710 ) = P ( <Z< ) = P ( -11 < Z < -9 )
10 10
= P (Z < -9) – P (Z < -11)
=

Exercise 2.8
Frequent fliers of a certain airline fly a random number of miles each year, having mean
and standard deviation of 25000 and 12000 miles, respectively. If 30 such people are
randomly chosen, approximate the probability that the average of their mileages for this
year will
(a) exceed 25000
According to Central Limit Theorem, for n = 30:
  = 30 x 25000 = 750 000
 2 = 120002 x 30
  = 12000√ 30
25000.30−750 000
 P (Z > ) = P (Z > 0) = 0.5
12000 √ 30

(b) be between 23000 and 27000

23 000.30−750 000 27 000.30−750 000
 P( <Z< ) = P (-0.91 < Z < 0.91)
12000 √ 30 12000 √ 30
= P (Z < 0.91) – P (Z < -0.91)
= P (Z < 0.91) – P (Z  0.91)
= P (Z < 0.91) – 1 + P(Z < 0.91)
= 2P (Z < 0.91) – 1 = 2 x 0.8186 – 1 = 0.6372
Exercise 2.9
A model for the movement of a stock supposes that, if the present price of the stock is s,
then – after one time period – it will either be us with probability p or ds with probability
1 – p. Assuming that successive movements are independent, approximate the probability
that the stock’s price will be up at least 30% after the next 1000 time periods if u = 1012, d
= .9990, and p = .52.