Assignment No.

3
Akash
Gaikwad
(FT241004)
Section 1

Q 21.

𝐸(𝑋) = 𝜇 = ∑ 𝑥 𝑝(𝑥)
𝑎𝑙𝑙 𝑥

a. The expected value of the job satisfaction score for senior executives
is E(X) = 1*0.05 + 2*0.09 + 3*0.03 + 4*0.42 + 5*0.41
= 4.05
b. The expected value of job satisfaction score for middle managers
is E(X) = 3.84

Var(𝑋) = 𝜎2 = 𝐸[(𝑋 − 𝜇)2] = ∑ (𝑥 − 𝜇)2 𝑝(𝑥)

𝑎𝑙𝑙 𝑥

c. The variance of job satisfaction scores for executives and middle managers
is Executives:
Var(X) = (1 - 4.05)2*0.05 + (2 - 4.05)2*0.09 + (3 - 4.05)2*0.03 + (4 – 4.05)2*0.42 + (5 –
4.05)2*0.41
= 1.2475
Middle Managers:
Var(X) = 1.1344

SD(𝑋) = 𝜎 = √𝜎2
d. SD for both probability distributions is
Executives:
SD(X) = √Var(X) = √1.2475 = 1.116915
Middle Managers:
SD(X) = √1.1344 = 1.065082
 Assignment No. 3
e. The expected value (average of the population) for job satisfaction score for executives is
higher as compared to middle managers, this means on average the executives are more
satisfied than the middle managers. But the job satisfaction score is more variable for
executives as SD is a little bit higher as compared to SD for middle managers.

Q 22.
a. The expected value for the monthly demand is
E(X) = 445
So, the company order quantity should be 445 units.

b. Actual demand = 300

Selling Price = $ 70
Order Quantity = 445
Cost Price = $50
Net gain/loss = Demand*S.P. – Order*C.P.
= 21000 – 22250
= -1250
The company made a loss of $1250.

Q 29
Given,
The expected value for return for S&P 500 (µ x) = 5.04%
The standard deviation for S&P 500 (σx) =19.45%

The expected value for return for a core bond (µy) = 5.78%
The standard deviation for core bond (σy) =2.13%

The correlation between S&P 500 and core bonds is ρxy = -0.32

a. Covariance between S&P 500 and core bonds:

σxy = σx *σy *ρxy

σxy = 19.45*2.13*(-0.32)

= -13.2571 %
 Assignment No. 3
b. E (aX + bY) = aE(X) + bE(Y) (Given a= 0.5, b=0.5)
= 0.5*5.04 + 0.5*5.78
= 5.41 %
Var (aX +bY) = a2Var(X) + b2Var(y) + 2ab σxy

=0.52*(19.45)2 + 0.52*(2.13)2 + 2*0.5*0.5*(-13.2571)

= 89.0813
SD (aX + bY) = √Var (aX +bY)
= 9.438289%
c. Given a = 0.2 b = 0.8
E (aX + bY) = 5.632%
SD (aX + bY) = √Var (aX +bY) = 3.713953%
d. Given a = 0.8 b = 0.2
E (aX + bY) = 5.188%
SD (aX + bY) = √Var (aX +bY) = 15.42896%
e. The portfolio with 20% investment in S&P 500 and 80% in core bonds gives the largest
expected return. The same portfolio has the smallest standard deviation. This portfolio is
the best to invest as the standard deviation for this portfolio is the smallest with the largest
returns.
f. Advantage of investing in portfolio (b): the expected return of 5.41 %
The disadvantage of investing in portfolio (b): risk of 9.438289%
Advantage of investing in portfolio (c): the expected return of 5.632%
The disadvantage of investing in portfolio (c): risk of 3.713953%
Advantage of investing in portfolio (d): the expected return of 5.188%
The disadvantage of investing in portfolio (d): risk of 15.42896%
I would like to invest all of my money into core bonds as the expected returns on the core
bonds are highest among the given portfolio (i.e., µy = 5.78%) and at the same time the risk
i.e., the standard deviation is the smallest (σy =2.13%) as compared to other portfolios.
 Assignment No. 3
Q 39.
Given p= 0.2037 n = 20
a. The probability that exactly 8 of 20 internet browser users use Chrome is given as P(X=8).
P(X=8) =BINOM.DIST(8,20,0.2037, FALSE)
= 0.024273
b. The probability that at least 3 of 20 internet browser users use Chrome is given as P(X≥3).
P(X≥3) = 1 – P(X<3)
= 1 -P(X≤2) = 1 -BINOM.DIST(2,20,0.2037, TRUE)
= 0.805077
c. The Expected number of Chrome users is given as
E(X) = np
= 20*0.2037
= 4.074
d. The Variance is given as
Var(X) = σ2 = np*(1 - p)
=4.074*(1 – 0.2037)
=3.24413

The standard deviation is given by

σ = √Var(X)
= √3.24413
=1.801146

Q 49
Given µ = 10 per minute
a. The probability that no arrivals in one minute is given by P(X=0)
P(X=0) = POISSON.DIST(0,10, FALSE)
= 0.0000454
b. The probability that three or fewer passengers arrive in one minute is given by
P(X≤3) = POISSON.DIST(3,10, TRUE)
= 0.010336
 Assignment No. 3
c. The probability that no arrivals in 15 seconds are given by P(X=0) where µ 15s= 2.5
P(X=0) = POISSON.DIST(0,2.5, FALSE)
=0.082085

d. The probability that at least one arrival in 15 seconds is given by P(X≥1) where µ 15s= 2.5
P(X≥1) = 1 – P(X<1)
= 1 – P(X≤0)
= 1 – 0.082085
= 0.917915