Professional Documents
Culture Documents
1. The time required to drive from New York to New Mexico is a discrete random variable.
a. True
b. False
ANSWER: False
2. A random variable is a function or rule that assigns a number to each outcome of an experiment.
a. True
b. False
ANSWER: True
3. The number of home insurance policy holders is an example of a discrete random variable
a. True
b. False
ANSWER: True
4. The mean of a discrete probability distribution for X is the sum of all possible values of X, divided by the number of
possible values of X.
a. True
b. False
ANSWER: False
5. The length of time for which an apartment in a large complex remains vacant is a discrete random variable.
a. True
b. False
ANSWER: False
7. A continuous variable may take on any value within its relevant range even though the measurement device may not be
precise enough to record it.
a. True
b. False
ANSWER: True
8. Given that X is a discrete random variable, then the laws of expected value and variance can be applied to show that
E(X + 5) = E(X) + 5, and V(X + 5) = V(X) + 25.
a. True
b. False
ANSWER: False
10. Faculty rank (professor, associate professor, assistant professor, and lecturer) is an example of a discrete random
variable.
a. True
b. False
ANSWER: False
11. For a random variable X, if V(cX) = 4V(X), where V refers to the variance, then c must be 2.
a. True
b. False
ANSWER: True
12. The amount of milk consumed by a baby in a day is an example of a discrete random variable.
a. True
b. False
ANSWER: False
13. Another name for the mean of a probability distribution is its expected value.
a. True
b. False
ANSWER: True
14. For a random variable X, E(X + 2) − 5 = E(X) − 3, where E refers to the expected value.
a. True
b. False
ANSWER: True
15. For a random variable X, V(X + 3) = V(X + 6), where V refers to the variance.
a. True
b. False
ANSWER: True
18. The Poisson random variable is a discrete random variable with infinitely many possible values.
a. True
b. False
ANSWER: True
19. The mean of a Poisson distribution, where μ is the average number of successes occurring in a specified interval, is μ.
a. True
b. False
ANSWER: True
20. The number of accidents that occur at a busy intersection in one month is an example of a Poisson random variable.
a. True
b. False
ANSWER: True
21. The number of customers arriving at a department store in a 5-minute period has a Poisson distribution.
a. True
b. False
ANSWER: True
22. The number of customers making a purchase out of 30 randomly selected customers has a Poisson distribution.
a. True
b. False
ANSWER: False
23. The largest value that a Poisson random variable X can have is n.
a. True
b. False
ANSWER: False
24. The Poisson distribution is applied to events for which the probability of occurrence over a given span of time, space,
or distance is very small.
a. True
b. False
ANSWER: True
25. In a Poisson distribution, the variance and standard deviation are equal.
a. True
b. False
ANSWER: False
26. In a Poisson distribution, the mean and standard deviation are equal.
a. True
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Multiple Choice
27. A table, formula, or graph that shows all possible values a random variable can assume, together with their associated
probabilities, is called a(n):
a. probability distribution.
b. discrete random variable.
c. expected value of a discrete random variable.
d. None of these choices.
ANSWER: a
28. A function or rule that assigns a numerical value to each outcome of an experiment is called:
a. a sample space. b. a probability distribution.
c. a random variable. d. None of these choices.
ANSWER: c
29. The weighted average of the possible values that a random variable X can assume, where the weights are the
probabilities of occurrence of those values, is referred to as the:
a. variance. b. standard deviation.
c. expected value. d. None of these choices.
ANSWER: c
30. The number of accidents that occur annually on a busy stretch of highway is an example of:
a. a discrete random variable.
b. a continuous random variable.
c. expected value of a discrete random variable.
d. expected value of a continuous random variable.
ANSWER: a
31. Which of the following are required conditions for the distribution of a discrete random variable X that can assume
values xi?
a. 0 ≤ p(xi) ≤ 1 for all xi b.
c. Both a and b are required conditions. d. Neither a nor b are required conditions.
ANSWER: c
32. Which of the following is not a required condition for the distribution of a discrete random variable X that can assume
values xi?
a. 0 ≤ p(xi) ≤ 1 for all xi b.
33. A lab at the DeBakey Institute orders 150 rats a week for each of the 52 weeks in the year for experiments that the lab
conducts. Suppose the mean cost of rats used in lab experiments turned out to be $20.00 per week. Interpret this value.
a. Most of the weeks resulted in rat costs of $20.00
b. The median cost for the distribution of rat costs is $20.00
c. The expected or average costs for all weekly rat purchases is $20.00
d. The rat cost that occurs more often than any other is $20.00
ANSWER: c
34. In the notation below, X is the random variable, c is a constant, and V refers to the variance. Which of the following
laws of variance is not true?
a. V(c) = 0 b. V(X + c) = V(X) + c
c. V(cX) = c2 V(X) d. None of these choices.
ANSWER: b
37. In the notation below, X is the random variable, E and V refer to the expected value and variance, respectively. Which
of the following is false?
a. E(3X) = 3E(X) b. V(2) = 0
c. E(X + 1) = E(X) + 1 d. All of these choices are true.
ANSWER: d
39. The Sutton police department must write, on average, 6 tickets a day to keep department revenues at budgeted levels.
Suppose the number of tickets written per day follows a Poisson distribution with a mean of 6.5 tickets per day. Interpret
the value of the mean.
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41. Given a Poisson random variable X, where the average number of successes occurring in a specified interval is 1.8,
then P(X = 0) is:
a. 1.8
b. 1.3416
c. 0.1653
d. 6.05
ANSWER: c
43. On the average, 1.6 customers per minute arrive at any one of the checkout counters of Sunshine food market. What
type of probability distribution can be used to find out the probability that there will be no customers arriving at a
checkout counter in 10 minutes?
a. Poisson distribution
b. Normal distribution
c. Binomial distribution
d. None of these choices.
ANSWER: a
44. A community college has 150 word processors. The probability that any one of them will require repair on a given day
is 0.025. To find the probability that exactly 25 of the word processors will require repair, one will use what type of
probability distribution?
a. Normal distribution
b. Poisson distribution
c. Binomial distribution
d. None of these choices.
Completion
45. A motorcycle insurance company evaluates many numerical variables about a person before deciding on an
appropriate rate for motorcycle insurance. How long a person has been a licensed rider is an example of a(n)
____________________ random variable.
ANSWER: continuous
46. An auto insurance company evaluates many numerical variables about a person before deciding on an appropriate rate
for automobile insurance. The number of claims a person has made in the last 3 years is an example of a(n)
____________________ random variable.
ANSWER: discrete
47. An auto insurance company evaluates many numerical variables about a person before deciding on an appropriate rate
for automobile insurance. A person's age is an example of a(n) ____________________ random variable.
ANSWER: continuous
48. A motorcycle insurance company evaluates many numerical variables about a person before deciding on an
appropriate rate for motorcycle insurance. The number of tickets a person has received in the last 3 years is an example of
a(n) ____________________ random variable.
ANSWER: discrete
49. A motorcycle insurance company evaluates many numerical variables about a person before deciding on an
appropriate rate for motorcycle insurance. The distance a person rides in a year is an example of a(n)
____________________ random variable.
ANSWER: continuous
50. The dean of students conducted a survey on campus. Grade point average (GPA) is an example of a(n)
____________________ random variable.
ANSWER: continuous
51. The amount of time that a microcomputer is used per week is an example of a(n) ____________________ random
variable.
ANSWER: continuous
52. The number of days that a microcomputer goes without a breakdown is an example of a(n) ____________________
random variable.
ANSWER: discrete
53. A(n) ____________________ random variable is one whose values are uncountable.
ANSWER: continuous
54. A(n) ____________________ random variable is one whose values are countable.
ANSWER: discrete
55. In a Poisson experiment, the number of successes that occur in any interval of time is ____________________ of the
number of success that occur in any other interval.
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56. In a(n) ____________________ experiment, the probability of a success in an interval is the same for all equal-sized
intervals.
ANSWER: Poisson
57. In a Poisson experiment, the probability of a success in an interval is ____________________ to the size of the
interval.
ANSWER: proportional
58. In Poisson experiment, the probability of more than one success in an interval approaches ____________________ as
the interval becomes smaller.
ANSWER: zero
0
59. A Poisson random variable is the number of successes that occur in a period of ____________________ or an interval
of ____________________ in a Poisson experiment.
ANSWER: time; space
60. The ____________________ of a Poisson distribution is the rate at which successes occur for a given period of time
or interval of space.
ANSWER: mean
expected value
65. For each of the following random variables, indicate whether the variable is discrete or continuous, and specify the
possible values that it can assume.
a. X = the number of traffic accidents in Albuquerque on a given day.
b. X = the amount of weight lost in a month by a randomly selected dieter.
c. X = the average number of children per family in a random sample of 175 families.
d. X = the number of households out of 10 surveyed that own a convection oven.
e. X = the time in minutes required to obtain service in a restaurant.
ANSWER:
a. discrete; x = 0, 1, 2, 3, . . .
b. continuous; −∞ < x < ∞
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Number of Motorcycles
The probability distribution of a discrete random variable X is shown below, where X represents the number of
motorcycles owned by a family.
x 0 1 2 3
p(x) 0.25 0.40 0.20 0.15
69. {Number of Motorcycles Narrative} Apply the laws of expected value to find the following:
a. E(X2)
b. E(2X2 + 5)
c. E(X − 2)2
ANSWER:
a. 2.55
b. 10.1
c. 1.55
70. {Number of Motorcycles Narrative} Apply the laws of expected value and variance to find the following:
a. V(3X)
b. V(3X − 2)
c. V(3)
d. V(3X) − 2
ANSWER:
a. 8.89
b. 8.89
c. 0
d. 6.89
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Number of Horses
The random variable X represents the number of horses per family in a rural area in Iowa, with the probability
distribution: p(x) = 0.05x, x = 2, 3, 4, 5, or 6.
71. {Number of Horses Narrative} Express the probability distribution in tabular form.
ANSWER:
x 2 3 4 5 6
p(x) 0.10 0.15 0.20 0.25 0.30
72. {Number of Horses Narrative} Find the expected number of horses per family.
ANSWER: E(X) = 4.5
73. {Number of Horses Narrative} Find the variance and standard deviation of X.
ANSWER: σ2 = 1.75 and σ = 1.323
75. Determine which of the following are not valid probability distributions, and explain why not.
a. x 0 1 2 3
p(x) 0.15 0.25 0.35 0.45
b. x 2 3 4 5
p(x) −0.10 0.40 0.50 0.25
c. x −2 −1 0 1 2
p(x) 0.10 0.20 0.40 0.20 0.10
ANSWER:
a. This is not a valid probability distribution because the probabilities don't sum to one.
b. This is not a valid probability distribution because it contains a negative probability.
c. This is a valid probability distribution.
Blackjack
The probability distribution of a random variable X is shown below, where X represents the amount of money (in $1,000s)
gained or lost in a particular game of Blackjack.
77. {Blackjack Narrative} Find the following values and indicate their units.
a. E(X)
b. V(X)
c. Standard deviation of X
ANSWER:
a. $3.40
b. 19.64 (dollars squared)
c. $4.43
Gym Visits
Let X represent the number of times a student visits a gym in a one month period. Assume that the probability distribution
of X is as follows:
x 0 1 2 3
p(x) 0.05 0.25 0.50 0.20
78. {Gym Visits Narrative} Find the mean μ and the standard deviation σ of this distribution.
ANSWER: μx = 1.85 and σx = 0.792
79. {Gym Visits Narrative} Find the mean and the standard deviation of Y = 2X − 1.
ANSWER: μy = 2.70 and σy = 1.584
80. {Gym Visits Narrative} What is the probability that the student visits the gym at least once in a month?
ANSWER: P(1) + P(2) + P(3) = 0.95
81. {Gym Visits Narrative} What is the probability that the student visits the gym at most twice in a month?
ANSWER: P(0) + P(1) + P(2) = 0.80
82. The monthly sales at a Gas Station have a mean of $50,000 and a standard deviation of $6,000. Profits are calculated
by multiplying sales by 40% and subtracting fixed costs of $12,000. Find the mean and standard deviation of monthly
profits.
ANSWER: Let P = profit and X = sales. Then P = 0.40X − 12,000.
Shopping Outlet
A shopping outlet estimates the probability distribution of the number of stores shoppers actually enter as shown in the
table below.
x 0 1 2 3 4
p(x) 0.05 0.35 0.25 0.20 0.15
83. {Shopping Outlet Narrative} Find the expected value of the number of stores entered.
ANSWER: E(X) = 2.05
84. {Shopping Outlet Narrative} Find the variance and standard deviation of the number of stores entered.
ANSWER:
85. {Shopping Outlet Narrative} Suppose Y = 2X + 1 for each value of X. What is the probability distribution of Y?
ANSWER:
y 1 3 5 7 9
P(y) 0.05 0.35 0.25 0.20 0.15
86. {Shopping Outlet Narrative} Calculate the expected value of Y directly from the probability distribution of Y.
ANSWER: E(Y) = 5.10
87. {Shopping Outlet Narrative} Use the laws of expected value to calculate the mean of Y from the probability
distribution of X.
ANSWER: E(Y) = E(2X + 1) = 2E(X) + 1 = 2(2.05) + 1 = 5.10
88. {Shopping Outlet Narrative} Calculate the variance and standard deviation of Y directly from the probability
distribution of Y.
ANSWER:
89. {Shopping Outlet Narrative} Use the laws of variance to calculate the variance and standard deviation of Y from the
probability distribution of X.
ANSWER: V(Y) = V(2X + 1) = 4V(X) = 4(1.3475) = 5.39; SD(Y) = √V(X) = √5.39 = 2.32
90. {Shopping Outlet Narrative} What did you notice about the mean, variance, and standard deviation of Y = 2X + 1 in
terms of the mean, variance, and standard deviation of X?
ANSWER: E(Y) = 2E(X) + 1, V(Y) = 4V(X), and SD(Y) = 2SD(X).
Retries
The following table contains the probability distribution for X = the number of retries necessary to successfully transmit a
1024K data package through a double satellite media.
93. {Retries Narrative} What is the mean or expected value for the number of retries?
ANSWER: E(X) = 1.0
94. {Retries Narrative} What is the variance for the number of retries?
ANSWER: V(X) = 0.80
95. {Retries Narrative} What is the standard deviation of the number of retries?
ANSWER: σ = 0.894
96. The sum of the expected values always equals the expected value of the sums.
ANSWER: T
98. If X and Y are independent variables with V(X) = 23.48 and V(Y) = 36.52, then the standard deviation of W = X + Y is
σw = 7.746.
ANSWER: T
99. The covariance can be negative but the coefficient of correlation cannot.
ANSWER: F
100. The variance of the sum always equals the sum of the variances.
ANSWER: F
103. If X and Y are two variables with , and COV(X, Y) = 11.76, then the coefficient of correlation
ρ = 0.8.
ANSWER: T
104. If X and Y are two variables with E(XY) = 10.56, E(X) = 4.22, and E(Y) = 5.34, then COV(X, Y) = 1.0.
ANSWER: F
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105. If X and Y are two variables with σx = 3.8, σy = 4.2, and COV(X, Y) = −0.25, then V(X + Y) = 31.58.
ANSWER: T
106. If you add two single probability distributions together you get a bivariate distribution.
ANSWER: F
107. The variance of X must be non-negative; the variance of Y must be non-negative; hence the covariance of X and Y
must be non-negative.
ANSWER: F
108. If X and Y are two variables with ,and COV(X, Y) = 14.703, then the coefficient of correlation ρ
= 0.78.
ANSWER: F
109. A statistical measure of the strength of the relationship between two random variables X and Y is referred to as the:
a. expected value
b. variance
c. covariance
d. standard deviation
ANSWER: C
110. If X and Y are random variables, the sum of all the conditional probabilities of X given a specific value of Y will
always be:
a. 0.0
b. 1.0
c. the average of the possible values of X.
d. the average of the possible values of Y.
ANSWER: B
111. If X and Y are random variables with E(X) = 6 and E(Y) = 9, then E(2X + 3Y) is:
a. 39
b. 15
c. 27
d. 12
ANSWER: A
113. If X and Y are any random variables with E(X) = 5, E(Y) = 6, E(XY) = 21, V(X) = 9 and V(Y) = 10, then the
relationship between X and Y is a:
a. strong positive relationship
b. strong negative relationship
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114. If X and Y are any random variables with COV(X, Y) = 0.25, , then the coefficient of
correlation ρ is
a. 1.417
b. 1.190
c. 0.595
d. 0.354
ANSWER: C
115. If X and Y are independent random variables, which of the following identities is false?
a. COV(X, Y) = 1
b. E(X + Y) = E(X) + E(Y)
c. V(X + Y) = V(X) + V(Y)
d. All of these choices are true.
ANSWER: A
116. A(n) ____________________ distribution provides probabilities of combinations of two random variables.
ANSWER: bivariate
117. The ____________________ of X and Y is one measure of the strength and direction of the linear relationship
between X and Y. However this number is hard to put into perspective.
ANSWER: covariance
118. The ____________________ of X and Y is a measure of the strength and direction of the linear relationship between
X and Y. It is easy to put into perspective because it is always between −1 and 1.
ANSWER: correlation
coefficient of correlation
119. The expected value of the sum of two random variables X and Y is equal to the ____________________ of the
expected value of X and the expected value of Y.
ANSWER: sum
120. If X and Y are ____________________, the variance of their sum is equal to the sum of their variances.
ANSWER: independent
122. If X and Y are independent, then the coefficient of correlation equals ____________________.
ANSWER: zero
0
123. In a bivariate distribution, the sum of all the ____________________ probabilities must equal 1.
ANSWER: joint
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124. A probability distribution for a single random variable is referred to as a(n) ____________________ distribution.
ANSWER: univariate
125. The ____________________ and the ____________________ both measure the relationship between two random
variables X and Y.
ANSWER: covariance; correlation
correlation; covariance
Number of Birds
Alana and Eva are sisters. Let X denote the number of birds that Alana may have in the next two years, and let Y denote
the number of birds Eva may have during the same period. The marginal probability distributions of X and Y are shown
below.
x 0 1 2 y 0 1 2
p(x) 0.5 0.3 0.2 p(y) 0.4 0.5 0.1
128. {Number of Birds Narrative} Assume that X and Y are independent and find their bivariate distribution.
ANSWER:
x
y 0 1 2
0 .20 .12 .08
1 .25 .15 .10
2 .05 .03 .02
130. {Number of Birds Narrative} Compute the coefficient of correlation between X and Y. Did you expect this result?
Why?
ANSWER:
Yes, since X and Y are independent variables.
131. {Number of Birds Narrative} Determine the probability distribution of the random variable X + Y.
ANSWER:
x+y 0 1 2 3 4
p(x+y) 0.20 0.37 0.28 0.13 0.02
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132. {Number of Birds Narrative} Calculate E(X + Y) directly by using the probability distribution of X + Y.
ANSWER: E(X + Y) = 1.40
133. {Number of Birds Narrative} Calculate V(X + Y) directly by using the probability distribution of X + Y.
ANSWER: V(X + Y) = 1.02
134. {Number of Birds Narrative} Verify that V(X + Y) = V(X) + V(Y). Did you expect this result? Why?
ANSWER: V(X) + V(Y) = 0.61 + 0.41 = 1.02 = V(X + Y). Yes, since X and Y are independent random variables.
135. {Number of Birds Narrative} Find the probability distribution of the random variable XY.
ANSWER:
xy 0 1 2 4
p(xy) 0.70 0.15 0.13 0.02
136. {Number of Birds Narrative} Calculate E(XY) directly by using the probability distribution of XY.
ANSWER: E(XY) = 0.49
137. {Number of Birds Narrative} Verify that E(XY) = E(X)E(Y). Did you expect this result? Why?
ANSWER: E(X)E(Y) = (0.7)(0.7) = 0.49 = E(XY). Yes, since X and Y are independent random variables.
Golfing Store
The joint probability distribution of variables X and Y is shown in the table below, where X is the number of drivers and Y
is the number of putters sold daily in a small golfing store.
X
Y 1 2 3
1 0.30 0.18 0.12
2 0.15 0.09 0.06
3 0.05 0.03 0.02
139. {Golfing Store Narrative} Determine the marginal probability distributions of X and Y.
ANSWER:
x 1 2 3
p(x) 0.5 0.3 0.2
y 1 2 3
p(y) 0.6 0.3 0.1
144. {Golfing Store Narrative} Calculate COV(X,Y). Did you expect this answer? Why?
ANSWER:
Yes, since X and Y are independent.
145. {Golfing Store Narrative} Find the probability distribution of the random variable X + Y.
ANSWER:
x+y 2 3 4 5 6
p(x+y) 0.30 0.33 0.26 0.09 0.02
146. {Golfing Store Narrative} Calculate E(X + Y) and V(X + Y) directly by using the probability distribution of X + Y.
ANSWER: E(X + Y) = 3.2
V(X + Y) = 1.06
147. {Golfing Store Narrative} Verify that V(X + Y) = V(X) + V(Y). Did you expect this result? Why?
ANSWER: V(X) + V(Y) = 0.61 + 0.45 = 1.06 + V(X + Y). Yes, since X and Y are independent random variables.
Number of Hamsters
The joint probability distribution of X and Y is shown in the accompanying table, where X denotes the number of hamsters
that Quinn may have next year, and Y denotes the number of hamsters that her boyfriend, Jason, may have when she
moves in with him next year.
X
Y 1 2
1 0.4 0.1
2 0.3 0.2
149. {Number of Hamsters Narrative} Determine the marginal probability distributions of X and Y.
ANSWER:
x 1 2
p(x) 0.7 0.3
y 1 2
p(y) 0.5 0.5
150. {Number of Hamsters Narrative} Calculate all possible values of the conditional probabilities, for X given Y and for
Y given X.
ANSWER: P(X = 1 | Y = 1) = 0.8, P(Y = 1 | X = 1) = 0.571
P(X = 1 | Y = 2) = 0.6, P(Y = 1 | X = 2) = 0.333
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152. {Number of Hamsters Narrative} Compute the covariance and the coefficient of correlation.
ANSWER: COV(X,Y) = E(XY) − E(X)E(Y) = 2.0 − (1.30)(1.50) = 0.05 and
ρxy = COV(X,Y) / σx σy = 0.05 / 0.229 = 0.218
Car Sales
The joint probability distribution of variables X and Y is shown in the table below. Rebecca and Rachel are car
salespeople. Let X denote the number of cars that Rebecca will sell in a month, and let Y denote the number of cars Rachel
will sell in a month.
X
Y 1 2 3
1 0.30 0.18 0.12
2 0.15 0.09 0.06
3 0.05 0.03 0.02
158. {Car Sales Narrative} Calculate E(X + Y) directly by using the probability distribution of X + Y.
ANSWER: E(X + Y) = 3.20
159. {Car Sales Narrative} Calculate V(X + Y) directly by using the probability distribution of X + Y.
ANSWER: V(X + Y) = 1.06
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161. {Car Sales Narrative} Verify that V(X + Y) = V(X) + V(Y). Did you expect this result? Why?
ANSWER: V(X) + V(Y) = 0.61 + 0.45 = 1.06 = V(X + Y). Yes, since X and Y are independent random variables.
162. {Mobile Phones Sales Narrative} Find the marginal probability distribution of the number of iPhones sold daily.
ANSWER:
x 1 2
P(x) 0.70 0.30
163. {Mobile Phones Sales Narrative} Compute the expected number of iPhones sold daily.
ANSWER: E(X) = 1.30
164. {Mobile Phones Sales Narrative} Compute the variance of the number of iPhones sold daily.
ANSWER: V(X) = 0.21
165. {Mobile Phones Sales Narrative} Find the marginal probability distribution of the number of Blackberries sold daily.
ANSWER:
y 1 2
P(y) 0.50 0.50
166. {Mobile Phones Sales Narrative} Find the marginal probability distribution of the number of Blackberries sold daily.
ANSWER: E(Y) = 1.50
167. {Mobile Phones Sales Narrative} Compute the variance of the number of Blackberries sold daily.
ANSWER: V(Y) = 0.25
169. {Mobile Phones Sales Narrative} Calculate E(X + Y) directly by using the probability distribution of X + Y.
ANSWER: E(X + Y) = 2.80
170. {Mobile Phones Sales Narrative} Calculate V(X + Y) directly by using the probability distribution of X + Y.
ANSWER: V(X + Y) = 0.56
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171. {Mobile Phones Sales Narrative} Compare V(X) + V(Y) to V(X + Y). What is your conclusion?
ANSWER: V(X) + V(Y) = 0.21 + 0.25 = 0.46 ≠ 0.56 = V(X + Y). We conclude that X and Y are not independent random
variables.
172. One of the ways in which financial analysts lower the risk that is associated with the stock market is through
diversification.
ANSWER: T
173. The expected return of a portfolio of two investments will be equal to the sum of the expected returns of the two
investments plus twice the covariance between the investments.
ANSWER: F
174. The expected return of a two-asset portfolio is equal to the product of the weight assigned to the first asset and the
expected return of the first asset plus the product of the weight assigned to the second asset and the expected return of the
second asset.
ANSWER: T
175. A portfolio return, Rp, of two stocks with individual returns, R1 and R2, is, in general, given by Rp = R1 + R2.
ANSWER: F
176. A portfolio expected return E(Rp) of 3 stocks with the quantities w1 = .40, w2 = .50, w3 = .10, E(R1) = .10, E(R2) =
.15, and E(R3) = .02 is equal to 0.117.
ANSWER: T
177. The covariance between two investments of a portfolio is equal to the sum of the variances of the investments.
ANSWER: F
178. If the covariance between two investments of a portfolio is zero, the variance of the portfolio will be equal to the sum
of the variances of the investments.
ANSWER: T
179. The variance of a portfolio of two investments will be equal to the sum of the variances of the two investments plus
twice the covariance between the investments.
ANSWER: T
180. The variance of a portfolio of two investments will be equal to the sum of the variances of the two investments when
the covariance between the investments is zero.
ANSWER: T
181. Which of the following regarding the mean and variance of a portfolio of two stocks is false?
a.
b.
c.
d.
ANSWER: A
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182. Which of the following regarding the mean and variance of a portfolio of k stocks is false?
a.
b.
c.
184. The following information regarding a portfolio of two stocks are given: w1 = .65, w2 = .35, E(R1) = .12, and E(R2) =
.14. Which of the following regarding the portfolio expected return, E(Rp), is correct?
a. .260
b. .127
c. .346
d. .374
ANSWER: B
185. The following information regarding a portfolio of two stocks are given: w1 = .25, w2 = .75, E(R1) = .08, and E(R2) =
.15. Which of the following regarding the portfolio expected return, E(Rp), is correct?
a. .3640
b. .2300
c. .1325
d. .1699
ANSWER: C
Returns on Investment
An analysis of the stock market produces the following information about the returns of two stocks.
Stock 1 Stock 2
Expected Returns 15% 18%
Standard Deviations 20 32
Assume that the returns are positively correlated with correlation coefficient of 0.80.
186. {Returns on Investment Narrative} Find the mean of the return on a portfolio consisting of an equal investment in
each of the two stocks.
187. {Returns on Investment Narrative} Find the standard deviation of the return on a portfolio consisting of an equal
investment in each of the two stocks.
ANSWER: The variance of the portfolio's return:
188. {Returns on Investment Narrative} Suppose that you wish to invest $1 million. Discuss whether you should invest
your money in stock 1, stock 2, or a portfolio composed of an equal amount of investments on both stocks.
ANSWER: Your choice of investment in stock 1, the portfolio, or stock 2, depends on your desired level of risk (variance
of return). The higher the risk you choose, the higher will be the expected return.
Risky Undertaking
Suppose you make a $2,000 investment in a risky undertaking. There is a 50% chance that the payoff from the investment
will be $5,000, a 20% chance that you will just get your money back, and a 30% chance that you will receive nothing at
all from your investment.
189. {Risky Undertaking Narrative} Find the expected value of the payoff from your investment of $2,000.
ANSWER: The expected value of the payoff from the $2,000 investment is:
E(Rp) = w1E(R1) + w2E(R2) + w3E(R3) = (0.5)($5000) + (0.2)($2000) + (0.3)($0) = $2900
190. {Risky Undertaking Narrative} Find the expected value of the net profit from your investment of $2,000.
ANSWER: The expected value of the net profit from the $2,000 investment:
E(net profit) = $2900 − $2000 = $900
191. {Risky Undertaking Narrative} If you invest $6,000 in the risky undertaking instead of $2,000 and the possible
payoffs triple accordingly, what are the expected value of the net profit from the $6,000 investment?
ANSWER: Expected value of the net profit from the $6,000 investment = 3($900) = $2,700
Elizabeth's Portfolio
Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes
that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%,
respectively.
192. {Elizabeth's Portfolio Narrative} Find the expected mean of the portfolio.
ANSWER: The expected return of the portfolio:
E(Rp) = w1E(R1) + w2E(R2) = 0.3(0.10) + 0.7(0.18) = 0.156 or 15.6%.
193. {Elizabeth's Portfolio Narrative} Compute the standard deviation of the returns on the portfolio assuming that the
two stocks' returns are perfectly positively correlated.
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Since the two stocks' returns are perfectly positively correlated, then ρ = 1; and V(Rp) = 0.04537. Therefore,
the standard deviation of the portfolio's return is 0.213 or 21.3%.
194. {Elizabeth's Portfolio Narrative} Compute the standard deviation of the returns on the portfolio assuming that the
coefficient of correlation is 0.5.
ANSWER: When ρ = 0.5; V(Rp) = 0.03781. Therefore, the standard deviation of the portfolio's return is 0.194 or 19.4%.
195. {Elizabeth's Portfolio Narrative} Compute the standard deviation of the returns on the portfolio assuming that the
two stocks' returns are uncorrelated.
ANSWER: When ρ = 0.0; V(Rp) = 0.03025. Therefore, the standard deviation of the portfolio's return is 0.174 or 17.4%.
196. {Elizabeth's Portfolio Narrative} Describe what happens to the standard deviation of the portfolio returns when the
coefficient of correlation ρ decreases.
ANSWER: The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases.
Katie’s Portfolio
Katie is given the following information about the returns on two stocks:
E(R1) = 0.10, E(R2) = 0.15, V(R1) = 0.0225, and V(R2) = 0.0441.
197. {Katie’s Portfolio Narrative} If Katie is most interested in maximizing her returns, which stock should she choose?
ANSWER: She should choose stock 2 because its expected value is higher.
198. {Katie’s Portfolio Narrative} If Katie is most interested in minimizing her risk, which stock should she choose?
ANSWER: She should choose stock 1 because its variance is smaller.
199. {Katie’s Portfolio Narrative} Compute the expected value of the portfolio composed of 60% stock 1 and 40% stock
2.
ANSWER: E(Rp) = w1E(R1) + w2E(R2) = (0.60)(0.10) + (0.40)(0.15) = 0.12
200. {Katie’s Portfolio Narrative} Compute the variance of the portfolio composed of 60% stock 1, and 40% stock 2, if
the coefficient of correlation is 0.40.
ANSWER:
201. {Katie’s Portfolio Narrative} Compute the expected value of the portfolio composed of 30% stock 1 and 70% stock
2.
ANSWER: E(Rp) = w1E(R1) + w2E(R2) = (0.30)(0.10) + (0.70)(.15) = 0.135
202. {Katie’s Portfolio Narrative} Compute the variance of the portfolio composed of 30% stock 1 and 70% stock 2, if the
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203. The binomial random variable is the number of successes that occur in a fixed period of time.
ANSWER: F
205. The binomial distribution deals with consecutive trials, each of which has two possible outcomes.
ANSWER: T
206. The number of customers arriving at a department store in a 5-minute period has a binomial distribution.
ANSWER: F
207. The variance of a binomial distribution for which n = 50 and p = 0.20 is 8.0.
ANSWER: T
208. The expected number of heads in 250 tosses of an unbiased coin is 125.
ANSWER: T
209. If X is a binomial random variable with n = 25, and p = 0.25, then P(X = 25) = 1.0.
ANSWER: F
210. The standard deviation of a binomial random variable X is given by the formula σ2 = np(1 − p), where n is the
number of trials, and p is the probability of success.
ANSWER: F
211. The number of female customers out of a random sample of 100 customers arriving at a department store has a
binomial distribution.
ANSWER: T
212. If the probability of success p remains constant in a binomial distribution, an increase in n will increase the variance.
ANSWER: T
213. If the probability of success p remains constant in a binomial distribution, an increase in n will not change the mean.
ANSWER: F
214. Which of the following about the binomial distribution is not a true statement?
a. The probability of success must be constant from trial to trial.
b. The random variable of interest is continuous.
c. Each outcome may be classified as either "success" or "failure".
d. Each outcome is independent of the other.
ANSWER: B
217. The variance of a binomial distribution for which n = 100 and p = 0.20 is:
a. 100
b. 80
c. 20
d. 16
ANSWER: D
219. If n = 20 and p = 0.70, then the standard deviation of the binomial distribution is
a. 0.14
b. 2.05
c. 14.0
d. 14.7
ANSWER: B
220. The expected value, E(X), of a binomial probability distribution with n trials and probability p of success is:
a. n + p
b. np(1 − p)
c. np
d. n + p − 1
ANSWER: C
222. In each trial of a binomial experiment, there are ____________________ possible outcomes.
ANSWER: two
2
225. The trials in a binomial experiment are ____________________, meaning the outcome of one trial does not affect
the outcomes of any other trials.
ANSWER: independent
228. The probability P(X ≤ x) is called a(n) ____________________ probability. The binomial table reports these
probabilities.
ANSWER: cumulative
229. To find the probability that X is at least 10, you should find the probability that X is 10 or ____________________.
ANSWER: more
230. To find the probability that X is at most 10, you should find the probability that X is 10 or ____________________.
ANSWER: less
Stress
Consider a binomial random variable X with n = 5 and p = 0. 40, where X represents the number of times in the final exam
week a student with 18 credit hours may feel stressed.
235. {Stress Narrative} Find the expected number of times a student may feel stressed during the final exam week.
ANSWER: E(X) = 2
237. Given a binomial random variable with n = 20 and p = 0.60, find the following probabilities using the binomial table.
a. P(X ≤ 13)
b. P(X ≥ 15)
c. P(X = 17)
d. P(11 ≤ X ≤ 14)
e. P(11 < X < 14)
ANSWER:
a. 0.75
b. 0.1256
c. 0.0124
d. 0.6297
e. 0.3456
Montana Highways
A recent survey in Montana revealed that 60% of the vehicles traveling on highways, where speed limits are posted at 70
miles per hour, were exceeding the limit. Suppose you randomly record the speeds of ten vehicles traveling on US 131
where the speed limit is 70 miles per hour. Let X denote the number of vehicles that were exceeding the limit.
243. {Montana Highways Narrative} Find the expected number of vehicles that are traveling on Montana highways and
exceeding the speed limit.
244. {Montana Highways Narrative} Find the standard deviation of number of vehicles that are traveling on Montana
highways and exceeding the speed limit.
ANSWER: σ = 1.549
Online Bankers
An official from the securities commission estimates that 75% of all online bankers have profited from the use of insider
information. Assume that 15 online bankers are selected at random from the commission's registry.
245. {Online Bankers Narrative} Find the probability that at most 10 have profited from insider information.
ANSWER: 0.3135
246. {Online Bankers Narrative} Find the probability that at least 6 have profited from insider information.
ANSWER: 0.9992
247. {Online Bankers Narrative} Find the probability that all 15 have profited from insider information.
ANSWER: 0.0134
248. {Online Bankers Narrative} What is the expected number of Online bankers who have profited from the use of
insider information?
ANSWER: E(X) = 11.25
249. {Online Bankers Narrative} Find the variance and standard deviation of the number of Online bankers who have
profited from the use of insider information.
ANSWER: σ2 = 2.8125 and σ = 1.677
251. A remedial program evenly enrolls tradition and non-traditional students. If a random sample of 4 students is selected
from the program to be interviewed about the introduction of a new on-line class, what is the probability that all 4 students
selected are traditional students?
ANSWER: .0625
252. If X has a binomial distribution with n = 4 and p = 0.3, find P(X = 1).
ANSWER: 0.4116
253. If X has a binomial distribution with n = 4 and p = 0.3, find P(X > 1).
ANSWER: 0.3483
254. If X has a binomial distribution with n = 4 and p = 0.3, find the probability that X is at most one.
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255. If X has a binomial distribution with n = 4 and p = 0.3, find the probability that X is at least one.
ANSWER: .7599
Sports Fans
Suppose that past history shows that 5% of college students are sports fans. A sample of 10 students is to be selected.
256. {Sports Fans Narrative} Find the probability that exactly 1 student is a sports fan.
ANSWER: 0.3151
257. {Sports Fans Narrative} Find the probability that at least 1 student is a sports fan.
ANSWER: 0.4013
258. {Sports Fans Narrative} Find the probability that less than 1 student is a sports fan.
ANSWER: 0.5987
259. {Sports Fans Narrative} Find the probability that at most 1 student is a sports fan.
ANSWER: 0.9139
260. {Sports Fans Narrative} Find the probability that more than 1 student is a sports fan.
ANSWER: 0.0861
261. {Sports Fans Narrative} A sample of 100 students is to be selected. What is the average number that you would
expect to sports fan?
ANSWER: 5
262. {Sports Fans Narrative} A sample of 100 students is to be selected. What is the standard deviation of the number of
sports fans you expect?
ANSWER: 2.18
263. Compute the following Poisson probabilities (to 4 decimal places) using the Poisson formula:
a. P(X = 3), if μ = 2.5
b. P(X ≤ 1), if μ = 2.0
c. P(X ≥ 2), if μ = 3.0
ANSWER:
a. 0.2138
b. 0.4060
c. 0.8009
264. Let X be a Poisson random variable with μ = 6. Use the table of Poisson probabilities to calculate:
a. P(X ≤ 8)
b. P(X = 8)
c. P(X ≥ 5)
d. P(6 ≤ X ≤ 10)
ANSWER:
a. 0.8472
b. 0.1032
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265. Let X be a Poisson random variable with μ = 8. Use the table of Poisson probabilities to calculate:
a. P(X ≤ 6)
b. P(X = 4)
c. P(X ≥ 3)
d. P(9 ≤ X ≤ 14)
ANSWER:
a. 0.3134
b. 0.0573
c. 0.9862
d. 0.3902
266. {911 Phone Calls Narrative} Find the probability of receiving two calls in a five-minute interval of time.
ANSWER: μ = 5(30/60) = 2.5; P(X = 2) = 0.2565
267. {911 Phone Calls Narrative} Find the probability of receiving exactly eight calls in 15 minutes.
ANSWER: μ = 15(30/60) = 7.5; P(X = 8) = 0.1373
268. {911 Phone Calls Narrative} If no calls are currently being processed, what is the probability that the desk employee
can take four minutes break without being interrupted?
ANSWER: μ = 4(30/60) = 2.0; P(X = 0) = 0.1353
269. {Classified Department Phone Calls Narrative} Find the probability that the department will receive 13 calls between
2 and 4 P.M. on a particular afternoon.
ANSWER: μ = 10; P(X = 13) = 0.0729
270. {Classified Department Phone Calls Narrative} Find the probability that the department will receive seven calls
between 2 and 3 P.M. on a particular afternoon.
ANSWER: μ = 10; P(X = 7) = 0.0901
271. {Classified Department Phone Calls Narrative} Find the probability that the department will receive at least five calls
between 2 and 4 P.M. on a particular afternoon.
ANSWER: μ = 10; P(X ≥ 5) = 0.9707
Post office
The number of arrivals at a local post office between 3:00 and 5:00 P.M. has a Poisson distribution with a mean of 12.
272. {Post Office Narrative} Find the probability that the number of arrivals between 3:00 and 5:00 P.M. is at least 10.
ANSWER: μ =12; P(X ≥ 10) = 0.7576
273. {Post Office Narrative} Find the probability that the number of arrivals between 3:30 and 4:00 P.M. is at least 10.
ANSWER: μ = 3; P(X ≥ 10) = 0.0011
274. {{Post Office Narrative} Find the probability that the number of arrivals between 4:00 and 5:00 P.M. is exactly two.
ANSWER: μ = 6; P(X = 2) = 0.0446
275. Suppose that the number of buses arriving at a Depot per minute is a Poisson process. If the average number of buses
arriving per minute is 3, what is the probability that exactly 6 buses arrive in the next minute?
ANSWER: 0.0504
276. {Unsafe Levels of Radioactivity Narrative} Find the probability that there will be exactly 3 incidents in a year.
ANSWER: 0.0892
277. {Unsafe Levels of Radioactivity Narrative} Find the probability that there will be at least 3 incidents in a year.
ANSWER: 0.9380
278. {Unsafe Levels of Radioactivity Narrative} Find the probability that there will be at least 1 incident in a year.
ANSWER: 0.9975
279. {Unsafe Levels of Radioactivity Narrative} Find the probability that there will be no more than 1 incident in a year.
ANSWER: 0.0174
280. {Unsafe Levels of Radioactivity Narrative} Find the variance of the number of incidents in one year.
ANSWER: 6
281. {Unsafe Levels of Radioactivity Narrative} Find the standard deviation of the number of incidents is in one year.
ANSWER: 2.45
282. One requirement of bivariate distributions is that 0 ≤ P(x, y) ≤ 1 for all pairs of values (x, y).
ANSWER: T