Intro Stats
Intro Stats
4th Edition
ISBN: 9780321826275
Author: Richard D. De Veaux
Publisher: PEARSON
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Chapter 21, Problem 39E

BST Many dairy cows now receive injections of BST, a hormone intended to spur greater milk production. After the first injection, a test herd of 60 Ayrshire cows increased their mean daily production from 47 pounds to 61 pounds of milk. The standard deviation of the increases was 5.2 pounds. We want to estimate the mean increase a farmer could expect in his own cows.

  1. a) Check the assumptions and conditions for inference.
  2. b) Write a 95% confidence interval.
  3. c) Explain what your interval means in this context.
  4. d) Given the cost of BST, a farmer believes he cannot afford to use it unless he is sure of attaining at least a 25% increase in milk production. Based on your confidence interval, what advice would you give him?
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Question 4. We consider a CRR model with So == 5 and up and down factors u = 1.03 and d = 0.96. We consider the interest rate r = 4% (over one period). Is this a suitable CRR model? (Explain your answer.)
Question 3. We want to price a put option with strike price K and expiration T. Two financial advisors estimate the parameters with two different statistical methods: they obtain the same return rate μ, the same volatility σ, but the first advisor has interest r₁ and the second advisor has interest rate r2 (r1>r2). They both use a CRR model with the same number of periods to price the option. Which advisor will get the larger price? (Explain your answer.)
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