There are 5 companies, each sells a bond that will pay $20 in one month. For each company the bond costs $10. All of these companies have probability .01 of default, and whether one defaults is independent from whether any of the others default. a) Let X be the number of companies that default. What is the distribution of X? What is the expected value of X? What is the variance of X? b) Consider two portfolios. In portfolio I, we buy one bond from each of these companies. In portfolio II, we buy 5 bonds from one of these companies. How much does portfolio I cost? How much does portfolio II cost?
There are 5 companies, each sells a bond that will pay $20 in one month. For each company the bond costs $10. All of these companies have probability .01 of default, and whether one defaults is independent from whether any of the others default. a) Let X be the number of companies that default. What is the distribution of X? What is the expected value of X? What is the variance of X? b) Consider two portfolios. In portfolio I, we buy one bond from each of these companies. In portfolio II, we buy 5 bonds from one of these companies. How much does portfolio I cost? How much does portfolio II cost?
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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Transcribed Image Text:There are 5 companies, each sells a bond that will pay $20 in one month. For each
company the bond costs $10. All of these companies have probability .01 of default, and
whether one defaults is independent from whether any of the others default.
a) Let X be the number of companies that default. What is the distribution of X? What
is the expected value of X? What is the variance of X?
b) Consider two portfolios. In portfolio I, we buy one bond from each of these companies.
In portfolio II, we buy 5 bonds from one of these companies. How much does portfolio I
cost? How much does portfolio II cost?
c) Let Y be the amount of money that we get in one month if we have portfolio I, and let
Transcribed Image Text:Z be the amount of money that we get in one month if we have portfolio II. Find the mea
and variance of Y and Z. Which has a higher mean and which has a higher variance?
d) What is the probability that I get at least my money back from portfolio I.
e) What is the probability that I get at least my money back from portfolio II.
f) Which portfolio would you choose to buy? Why?
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