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Managerial Statistics

Assignment 1 (due 9/13/2013)

Note all computer output must be handed in with the homework.

1)

Examine the data set bank.xls. Note EducLev and JobGrade should be treated as Categorical

a) Choose a continuous variable and produce a numerical summary of the variable.

b) Choose a categorical variable and produce a numerical summary of the variable.

c) Choose two categorical variables and produce a numerical summary of the joint distribution of the two variables.

d) Choose two continuous variables and produce a graphical summary of the joint distribution of the two

variables. Note: Numerical summaries for a single continuous variable can be produced via the Data tab (select Data Analysis and then Descriptive Statistics). Numerical summaries (contingency tables) can be produced using the Pivot Table option under the Insert tab. Finally the graphical summary of the two continuous variables can be produced using the Scatter option under the Insert tab.

2)

Stock puts are one of many products that are traded on the stock market. A put gives the holder the right to sell a share at a fixed price (called the exercise price and denoted K), on a fixed date (called the exercise date). However the holder of the put does not have to sell the share. This means if the share increases in value you cannot lose money but if it declines you can sell it at a higher price and make a profit. For example, if you have an option to sell one share of Google stock in 2 days time for \$400 and in 2 days time the share is worth \$390 you will make \$10, but if the share is worth \$410 you will not exercise your put so you will lose nothing. Obviously a stock put has some value because you can’t lose money but you can make money. However, calculating its value is difficult because it depends on the price of the corresponding share at the exercise date. The way this problem is dealt with in practice is to treat the value of the option on the exercise date as a random variable (say X) and to calculate the expected value of X. Suppose K=400 and Y (the value of Google shares in two days time) has the following distribution.

 y 375 395 415 P(Y=y) 0.25 0.5 0.25

a) What are the expected value and standard deviation of Y?

b) If X is the value of a put option to sell one Google share at the exercise date for \$K, and Y is the Google stock

price at the exercise date then

K

Y if Y

K

0 otherwise

X  

What are the expected value and standard deviation of X? Hint: First figure out all the possible values that X could take on depending on what value Y takes on. Then use the table for Y to work out the probability that each value of X will happen. Finally, produce a new probability distribution table for X and use it to compute the expected value and standard deviation.

3) Several recent graduates from Professor James’ IOM 530 Modern Applied Statistical Learning Methods class claim they can use the tools from the class to predict whether the stock market will go up or down each day. Suppose a student devises just such a method. She then buys into the stock market each day that the method predicts it will go up and short sells on any day the market is supposed to go down (short selling means you make money if the market declines and lose money if it goes up). She tries out this method for 250 trading days (approximately one year) and gets the following output.

One Variable Summary

Daily Returns Data Set #1

 Mean 0.15 Variance 0.25 Std. Dev. 0.5 Median 0.145 Minimum -3.036 Maximum 2.999 Count 250

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Managerial Statistics

Assignment 1 (due 9/13/2013)

Note that all numbers are in percentages so 0.15 means 0.15%. Assume no transaction costs. Note Std. Dev. in the above table corresponds to the sample standard deviation . Calculate a 95% confidence interval for the student’s average daily profit if she continued with this strategy into the future. You may use z in the calculation of the confidence interval.

4)

A statistician is up at 4 am feeding his 4 month old son. Just for fun he decides to start teaching him statistics. He surfs the web and finds a fascinating data set recording times to shear sheep. This is a big sport in some far flung corners of the globe! He takes these numbers to represent his population i.e. he actually knows the whole population. He then takes a random sample from the population. Below are summary statistics for the population and the sample. Note it is obviously impossible for any of the data points to be negative since they are times.

 Population Sample Times Times One Variable Summary Data Set #1 Data Set #1 Mean 61.93 71.00 Variance 5726.20 6985.86 Std. Dev. 75.67 83.58 Minimum 10.00 10.00 Maximum 783.00 385.00 Range 773.00 375.00 Count 1000 100 Sum 61925.00 7100.00

He asks his son to provide the following quantities based on the above output i.e. give actual numbers. His son has some problems, please help him out by providing the value associated with each symbol. No justification required for this part.

 i. μ ii. True SD(X ) iii. X iv. S v. σ vi. Our usual estimate for SD(X ) vii. E(X ) viii. n ix. N (i.e. the population size)

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