TEST 2

Time: 60 minutes

Question 1. (2 marks) Data evidence shows that last year 25% of the stocks in a stock
exchange performed well, 25% poorly, and the remaining 50% performed on average.
Moreover, 40% of those that performed well were rated a “good buy” by a stock analyst, as
were 20% of those that performed on average, and 10% of those that performed poorly.

a. (1 mark) What is the probability that a stock were rated a “good buy"?

b. (1 mark) What is the probability that a stock rated a “good buy" by the stock analyst will
perform well this year?

Solution

Let

E1 : a stock performed well

E2 : a stock performed on average

E3 : a stock performed poorly

A : a stock were rated a “good buy”

Then P  E1   0,25; P  E2   0,5; P  E3   0,25

and P  A | E1   0,4; P  A | E2   0,2; P  A | E3   0,1

a. P  A  ?

P  A  P  E1  P  A | E1   P  E2  P  A | E2   P  E3  P  A | E3 
9
 0, 25.0, 4  0,5.0, 2  0, 25.0,1 
40

b. P  E1 | A  ?

P  E1  A P  E1  P  A | E1  4
P  E1 | A   
P  A P  A 9
Question 2. (2 marks) A recent report in USA Today indicated a typical family of four
spends $490 per month on food. Assume the distribution of food expenditures for a family
of four follows the normal distribution, with a mean of $490 and a standard deviation of
$90.

a. (1 mark) What percent of the families spend more than $30 but less than $490 per month
on food?

b. (1 mark) What percent of the families spend less than $430 per month on food?

Solution

X N   ,  2  with   490,   90

a) P  30  X  490 =?

P  30  X  490 
 490     30   
 F F 
     
 F  0   F  5,11
 0,5  0
 0,5

b) P  X  430  ?

P  X  430 
 430   
 F   F   
  
 F  0,67   0
 1  F  0,67 
 0, 2514
Question 3. (1 mark) The following density function describes the random variable X.

x
 25 ;0 x5

10  x
f  x   ; 5  x  10
 25
0 ; x   0; 10 



Compute the probability that X is less than 7.

Solution

P  X  7
7
  f  x  dx

0 5 7
  f  x  dx   f  x  dx   f  x  dx
 0 5

10  x
0 5 7
x
  0 dx   25 dx  
 0 5
25
dx

 0,82
Question 4. (1 mark) A corporation is considering a new issue of convertible bonds.
Management believes that the offer terms will be found attractive by 20% of all its current
stockholders. Suppose that this belief is correct. A random sample of 130 current
stockholders is taken. What is the probability that the sample proportion is between 0.18 and
0.22?

Solution

P  0, 2
n  130

 
P 0,18  p  0, 22  ?

Since nP 1  P   20,8  5 , we have

 P 1  P  
p N  P; 
 n 
N  0, 2; 0,0352 

Therefore,


P 0,18  p  0, 22 
 0, 22  0, 2   0,18  0, 2 
 F  F 
 0,035   0,035 
 F  0,57   F  0,57 
 F  0,57   1  F  0,57  
 0, 4314
Question 5. (2 marks) A survey of 750 university students found they were paying on
average $108 per week in accommodation costs. Assume the population standard deviation
for weekly accommodation costs is $22.

a. (1 mark) Construct a 90 per cent confidence interval estimate of the population mean.

b. (1 mark) Construct a 95 per cent confidence interval estimate of the population mean.

Solution

n  750
x  108
  22

a. 1    0,9  z /2  z0,05  1,645

90 per cent confidence interval estimate of the population mean is


x  z /2  108  1,3214
n

b. 1    0,95  z /2  z0,025  1,96

95 per cent confidence interval estimate of the population mean is


x  z /2  108  1,5745
n
Question 6. (2 marks) After many years of teaching, a statistics professor computed the
variance of the marks on her final exam and found it to be  2 = 250. She recently made
changes to the way in which the final exam is marked and wondered whether this would
result in a reduction in the variance. A random sample of this year’s final exam marks are
listed here.

57 92 99 73 62 64 75 70 88 60

a. (1 mark) Calculate the sample mean and variance.

b. (1 mark) Can the professor infer at the 10% significance level that the variance has
decreased?

the variance has decreased? =>  2 < 250 => H_1

Solution

a.

x  74
s  14,499  s 2  210,221

b.

  0,1;  02  250; n  10

 H 0 : 2  250

 H1 :  250
2

 n  1 s 2   2
n 1,1   9, 0,9  4,168
2
Reject H0 if
0
2

Now,

 n  1 s 2  10  1 .14, 4992  7,567

 02 250

Hence we fail to reject H0 => reject H1 .

In conclusion, the professor cannot infer that the variance has decreased.