2021FIN2210 Problem Set 6

Probability for Finance

1. (a) Suppose the MGF MX (t) of a random variable X exists for t in some
neighborhood of 0. Will all moments of X exist? Explain.
(b) Suppose all moments of X exist. Will the MGF MX (t) exist? Explain.

2. Suppose a discrete random variable X has the following distribution

P𝑋 (𝑥) = (1 − γ)γ𝑥 , 𝑥 = 0, 1, 2, 3, … ,
Where Ƴ is a fixed parameter and 0 < γ < 1. Find: (a) the MGF of X; (b) the
∞
1
mean and the variance. [Hint: use the formula ∑ 𝑎𝑥 = for |a| < 1.]
𝑥=0 1−a

3. Suppose a N(µ, σ2 ) random variable has MGF

2 −5𝑡
M𝑋 (t) = 𝑒 10𝑡 , −∞ < t < ∞.

Find the mean and variance of X.

4. A discrete random variable X has mean equal to 4 and MGF

1 1
MX (t) = + 3 𝑒 −𝑡 + 𝑎𝑒 𝑏𝑡
2

(a) Find the values of a and b. (b) What is the distribution of X?

5. A discrete random variable X has mean 0, variance 2, and MGF

1 1
MX (t) = a(1 + be−2t + 4 𝑒 −𝑡 + 4 𝑒 𝑡 + 𝑐𝑒 2𝑡 ),−∞ < t < ∞:

(a) Find the values of a, b and c. (b) What is the distribution of X?

6. A random variable is said to have a twice-piece normal distribution with

parameters 𝜇, 𝜎1 ,𝜎2 if it has its PDF
 2 2
𝐴𝑒 −(𝑥−𝜇) /(2𝜎1 ) , 𝑥 ≤ 𝜇
𝑓𝑥(𝑥) = { −(𝑥−𝜇)2/(2𝜎 2 )
𝐴𝑒 2 , 𝑥 > 𝜇

(1) Find the value of constant A. (2) Find the mean of X. (3) Find the variance of
X.

7. Suppose X ∼𝑁(𝜇, 𝜎 2 ). Find the PDF of Y = 1/X.

8. (1) Find 𝑃(𝑋 > √𝑌 ) if 𝑋 and 𝑌 are jointly distributed with PDF 𝑓𝑋𝑌 (𝑥, 𝑦) =

𝑥 + 𝑦 𝑓𝑜𝑟 0 ≤ 𝑥 ≤ 1, 0 ≤ 𝑦 ≤ 1.

(2) Find 𝑃(𝑋 2 < 𝑌 < 𝑋) if 𝑋 and 𝑌 are jointly distributed with PDF
𝑓𝑋𝑌 (𝑥, 𝑦) = 2𝑥 𝑓𝑜𝑟 0 ≤ 𝑥 ≤ 1, 0 ≤ 𝑦 ≤ 1.