Problems: Statistics Review

1 Understanding Univariate Data

Consider the following data, complete the table and answer questions 1 through 3.

Period (t) Value (X) (Xt − X)2

1 10
2 15
3 30
4 23
5 17

1. What is the mean of the data set?

2. What is the variance of the data set?

3. What is the standard deviation of the data set?

1
2 The Normal Distribution
Suppose Y has the standard normal distribution, i.e. Y ∼ N (0, 1). Using this logic and simple
arithmetic, answer questions 4 through 8.

4. Give two intervals that contain 68% and 95% of the data, respectively.

5. P r(Y > 2)

6. P r(Y > −2)

7. P r(0 < Y < 2)

8. P r(−1 < Y < 2)

2
3 Expected Values of Discrete Random Variables
Let A denote an the uncertain return on an asset next period. Suppose A can only be 0.05, 0.10,
or 0.15 (we are measuring returns in decimals) with the following distribution:

A P r(A)

0.05 0.29
0.10 0.30
0.15 0.41

9. What is the expected value of A?

10. What is the variance deviation of A?

11. What is the standard deviation of A?

3
4 Understanding Bivariate Data
Below are the summary statistics for the Australia and New Zealand returns from the countries
data set (conret.xls). Use the information to answer questions 12 and 13.

Summary measures for selected variables:

Australia New Zealand

count 107 107

mean 0.0122 0.0094

variance 0.0029 0.0047

Table of correlations:
Australia New Zealand

Australia 1

New Zealand 0.670 1

12. What is the distribution of the New Zealand returns? What is the sample standard deviation?

13. What is the sample correlation between the Australia and New Zealand returns? What is the
sample covariance?

4
5 Confidence Intervals and Hypothesis Tests for Normal Data
Consider a data table containing returns of specific stocks. Your task is to organize them into
a portfolio focusing on maximizing return while minimizing risk. Stocks with a higher variance
generally imply greater risk. Suppose you are considering a stock with the following summary
statistics:

• X = 0.03

• VX = 0.0004

• n = 50

Using the above information, answer questions 14 through 16.

14. Construct a 95% plug-in predictive interval for the return of the stock next period.

15. Determine the 95% confidence interval.

16. Test the following two null hypotheses at the 5% level:

• H0 : µ = 0.00

• H0 : µ = 0.02

5
6 Confidence Intervals and Proportions
An analyst claims that the price of Proctor and Gamble (PG) is just as likely to go up as down, that
is p = 0.5. The analyst records a 1 if it goes up and a 0 if it goes down where p is the probability
that the stock goes up. Denote the variable as G.

17. Suppose the analyst’s claim is true. What is the distribution of G?

18. What is the mean and variance of G?

Now the analyst wants to test the claim. The data gathered is presented in the following graph
showing that the observed price went up 49 out of n = 92 days.

6
19. Upon analyzing the data, what is the distribution of p?

20. Determine a 95% confidence interval for p.

21. Perform a hypothesis test on the analyst’s claim.

7
7 Fitting the Distributions Together
Suppose an insurance company has calculated the average value of a claim as:

C ∼ N ($1, 950, $5002 )

22. Give an interval that is likely to contain 95% of the claim values.

23. Suppose the company’s threshold value on a claim is $2,450. Let X = 1 if a claim exceeds
$2,450 and X = 0 if not. What is the distribution of X?

24. Records show that the company processes roughly 10 claims per week over a 48 week year.
Let Y represent the number of claims in a year that exceeded $2, 450. What is the distribution
of Y ?

25. Give an interval that is likely to contain 95% of the claims exceeding $2, 450 in a year.