To determine Explain what an experiment is. Explanation Experiment: An experiment or trail is a procedure that can be repeated infinitely many number of times and has a well...

13th Edition

ISBN: 9780135820100

Author: MCCLAVE, James T., Sincich, Terry

Publisher: PEARSON

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Chapter 3.1, Problem 1UP

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Explain what an experiment is.

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Chapter 2, Problem 213CTC

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In this problem, we consider a Brownian motion (W+) t≥0. We consider a stock model (St)t>0 given (under the measure P) by d.St 0.03 St dt + 0.2 St dwt, with So 2. We assume that the interest rate is r = 0.06. The purpose of this problem is to price an option on this stock (which we name cubic put). This option is European-type, with maturity 3 months (i.e. T = 0.25 years), and payoff given by F = (8-5)+ (a) Write the Stochastic Differential Equation satisfied by (St) under the risk-neutral measure Q. (You don't need to prove it, simply give the answer.) (b) Give the price of a regular European put on (St) with maturity 3 months and strike K = 2. (c) Let X = S. Find the Stochastic Differential Equation satisfied by the process (Xt) under the measure Q. (d) Find an explicit expression for X₁ = S3 under measure Q. (e) Using the results above, find the price of the cubic put option mentioned above. (f) Is the price in (e) the same as in question (b)? (Explain why.)

Problem 4. Margrabe formula and the Greeks (20 pts) In the homework, we determined the Margrabe formula for the price of an option allowing you to swap an x-stock for a y-stock at time T. For stocks with initial values xo, yo, common volatility σ and correlation p, the formula was given by Fo=yo (d+)-x0Þ(d_), where In (±² Ꭲ d+ õ√T and σ = σ√√√2(1 - p). дго (a) We want to determine a "Greek" for ỡ on the option: find a formula for θα (b) Is дго θα positive or negative? (c) We consider a situation in which the correlation p between the two stocks increases: what can you say about the price Fo? (d) Assume that yo< xo and p = 1. What is the price of the option?

We consider a 4-dimensional stock price model given (under P) by dẴ₁ = µ· Xt dt + йt · ΣdŴt where (W) is an n-dimensional Brownian motion, π = (0.02, 0.01, -0.02, 0.05), 0.2 0 0 0 0.3 0.4 0 0 Σ= -0.1 -4a За 0 0.2 0.4 -0.1 0.2) and a E R. We assume that ☑0 = (1, 1, 1, 1) and that the interest rate on the market is r = 0.02. (a) Give a condition on a that would make stock #3 be the one with largest volatility. (b) Find the diversification coefficient for this portfolio as a function of a. (c) Determine the maximum diversification coefficient d that you could reach by varying the value of a? 2

Chapter 3 Solutions

Statistics

Ch. 3.1 - What is an experiment? Ch. 3.1 - What are the most basic outcomes of an experiment...Ch. 3.1 - Define the sample space. Ch. 3.1 - What is a Venn diagram? Ch. 3.1 - Give two probability rules for sample points. Ch. 3.1 - What is an event? Ch. 3.1 - How do you find the probability of an event made...Ch. 3.1 - Give a scenario where the combinations rule is...Ch. 3.1 - 3.1 An experiment results in one of the following...Ch. 3.1 - The following Venn diagram describes the sample...

Ch. 3.1 - 3.3 The sample space for an experiment contains...Ch. 3.1 - 3.4 Compute each of the following: Ch. 3.1 - 3.5 Compute the number of ways you can select n...Ch. 3.1 - Two fair dice are tossed, and the up face on each...Ch. 3.1 - 3.7 Two marbles are drawn at random and without...Ch. 3.1 - Simulate the experiment described in Exercise...Ch. 3.1 - Use the applet Simulating the Probability of...Ch. 3.1 - Use the applet Simulating the Probability of a...Ch. 3.1 - Do social robots walk or roll? Refer to the...Ch. 3.1 - Crop damage by wild boars. The level of crop...Ch. 3.1 - 3.11 Colors of M&M’s candies. When they were first...Ch. 3.1 - Rare underwater sounds. A study of underwater...Ch. 3.1 - USDA chicken inspection. The United States...Ch. 3.1 - African rhinos. Two species of rhinoceros native...Ch. 3.1 - STEM experiences for girls. Refer to the 2013...Ch. 3.1 - Health risks to beachgoers. According to a...Ch. 3.1 - Cheek teeth of extinct primates. Refer to the...Ch. 3.1 - Chance of rain. Answer the following question...Ch. 3.1 - Prob. 27ACI Ch. 3.1 - Museum management. Refer to the Museum Management...Ch. 3.1 - 3.109 Choosing portable grill displays. Consider a...Ch. 3.1 - Prob. 30ACI Ch. 3.1 - 3.22 Jai-alai bets. The Quinella bet at the...Ch. 3.1 - Using game simulation to teach a course. In...Ch. 3.1 - Lead bullets as forensic evidence. Chance (Summer...Ch. 3.1 - Matching socks. Consider the following question...Ch. 3.1 - Post-op nausea study. Nausea and vomiting after...Ch. 3.1 - Dominant versus recessive traits. An individual’s...Ch. 3.1 - Drug testing of firefighters. Hillsborough County,...Ch. 3.4 - Define in words mutually exclusive events. Ch. 3.4 - Define in words the union of two events. Ch. 3.4 - Define in words the intersection of two events. Ch. 3.4 - Define in words the complement of an event. Ch. 3.4 - Prob. 42UP Ch. 3.4 - State the additive rule of probability for...Ch. 3.4 - State the additive rule of probability for any two...Ch. 3.4 - 3.31 A fair coin is tossed three times, and the...Ch. 3.4 - 3.30 Suppose P (A) = A, P(B) = 7, and P (A ∩ B) =...Ch. 3.4 - 3.33 Consider the Venn diagram below, where P(E1)...Ch. 3.4 - Consider the following Venn diagram, where P(E1) =...Ch. 3.4 - 3.32 A pair of fair dice is tossed. Define the...Ch. 3.4 - Three fair coins are tossed. We wish to find the...Ch. 3.4 - The outcomes of two variables are (Low. Medium....Ch. 3.4 - Use the applets Simulating the Probability of...Ch. 3.4 - Use the applets Simulating the Probability of...Ch. 3.4 - Social networking. According to the Pew Research...Ch. 3.4 - 3.37 Do social robots walk or roll? Refer to the...Ch. 3.4 - 3.39 Study of analysts' forecasts. The Journal of...Ch. 3.4 - Gene expression profiling. Gene expression...Ch. 3.4 - 3.41 Scanning errors at Walmart. The National...Ch. 3.4 - Sleep apnea and sleep stage transitioning. Sleep...Ch. 3.4 - Attempted suicide methods. A study of attempted...Ch. 3.4 - 3.48 Guilt in decision making. The effect of guilt...Ch. 3.4 - Prob. 60ACI Ch. 3.4 - Fighting probability of fallow deer bucks. In...Ch. 3.4 - 3.47 Cell phone handoff behavior. A "handoff' is a...Ch. 3.4 - Chemical signals of mice. The ability of a mouse...Ch. 3.4 - Employee behavior problems. The Organizational...Ch. 3.4 - Cloning credit or debit cards. Wireless identity...Ch. 3.4 - 3.50 Galileo's Passedix game. Passedix is a game...Ch. 3.4 - 3.51 Encoding variability in software. At the 2012...Ch. 3.6 - Explain the difference between an unconditional...Ch. 3.6 - Give the multiplicative rule of probability...Ch. 3.6 - Give the formula for finding P(B|A). Ch. 3.6 - Defend or refute each of the following...Ch. 3.6 - 3.52 For two events, A and B, P (A) − .4, P (B) −...Ch. 3.6 - 3.53 For two events, A and B, P (A) = .4, P (B) =...Ch. 3.6 - An experiment results in one of three mutually...Ch. 3.6 - 3.55 For two independent events, A and B, P (A) =...Ch. 3.6 - An experiment results in one of five sample points...Ch. 3.6 - Consider the experiment defined by the...Ch. 3.6 - 3.59 A sample space contains six sample points and...Ch. 3.6 - 3.58 Two fair dice are tossed, and the following...Ch. 3.6 - A box contains two white, two red, and two blue...Ch. 3.6 - Use the applet Simulating the Probability of...Ch. 3.6 - 3.63 Blood diamonds. According to Global Research...Ch. 3.6 - 3.64 Do social robots walk or roll? Refer to the...Ch. 3.6 - Crop damage by wild boars. Refer to the Current...Ch. 3.6 - Cardiac stress testing. In addition to standard...Ch. 3.6 - National firearms survey. The Harvard School of...Ch. 3.6 - Guilt in decision making. Refer to the Journal of...Ch. 3.6 - Speeding linked to fatal car crashes. According to...Ch. 3.6 - Appraisals and negative emotions. According to...Ch. 3.6 - Prob. 89ACI Ch. 3.6 - Sleep apnea and sleep stage transitioning. Refer...Ch. 3.6 - 3.73 Firefighters' use of gas detection devices....Ch. 3.6 - Compensatory advantage in education. According to...Ch. 3.6 - 3.75 Are you really being served red snapper? Red...Ch. 3.6 - Fighting probability of fallow deer bucks. Refer...Ch. 3.6 - Extinct New Zealand birds. Refer to the...Ch. 3.6 - Muscle, fat, and bone issues while aging. In...Ch. 3.6 - 3.71 Ambulance response time. Geographical...Ch. 3.6 - Intrusion detection systems. A computer intrusion...Ch. 3.6 - Detecting traces of TNT. University of Florida...Ch. 3.6 - Random mutation of cells. Chance (Spring 2010)...Ch. 3.6 - Testing a psychic’s ability. Consider an...Ch. 3.6 - 3.78 Risk of a natural gas pipeline accident....Ch. 3.6 - 3.80 Encryption systems with erroneous...Ch. 3.7 - Give a scenario where the multiplicative rule...Ch. 3.7 - Give a scenario where the permutations rule...Ch. 3.7 - Give a scenario where the partitions rule...Ch. 3.7 - What is the difference between the permutations...Ch. 3.7 - Find the numerical values of Ch. 3.7 - Use the multiplicative rule to determine the...Ch. 3.7 - Determine the number of sample points contained in...Ch. 3.7 - An experiment consists of choosing objects without...Ch. 3.7 - Cheek teeth of extinct primates. Refer to the...Ch. 3.7 - Choosing portable grill displays. Refer to the...Ch. 3.7 - Monitoring impedance to leg movements. In an...Ch. 3.7 - Picking a basketball team. Suppose you are to...Ch. 3.7 - Selecting project teams. Suppose you are managing...Ch. 3.7 - 3.125 Using game simulation to teach a course. In...Ch. 3.7 - U.S. ZIP codes. The nine-digit ZIP code has become...Ch. 3.7 - Traveling between cities. A salesperson living in...Ch. 3.7 - Football uniform combinations. Nike manufactures...Ch. 3.7 - Kiwifruit as an iron supplement. An article...Ch. 3.7 - Randomization in a study of TV commercials....Ch. 3.7 - Multilevel marketing schemes. Successful companies...Ch. 3.7 - Mathematical theory of partitions. Mathematicians...Ch. 3.7 - The “marriage” problem. A mathematics assignment...Ch. 3.7 - Florida license plates. In the mid-1980s, the...Ch. 3.7 - Selecting a maintenance support system. In the...Ch. 3.7 - Volleyball positions. Intercollegiate volleyball...Ch. 3.7 - Studying exam questions. A college professor hands...Ch. 3.7 - Modeling the behavior of granular media. Granular...Ch. 3.7 - A straight flush in poker. Consider 5-card poker...Ch. 3.8 - Explain the difference between the two...Ch. 3.8 - Why is Bayes’s rule unnecessary for finding P(B|A)...Ch. 3.8 - Why is Bayes’s rule unnecessary for finding P(B|A)...Ch. 3.8 - 3.81 Suppose the events B1 and B2 are mutually...Ch. 3.8 - 3.82 Suppose the events B1, B2, and B3 are...Ch. 3.8 - 3.83 Suppose the events B1, B2, and B3 are...Ch. 3.8 - Reverse-engineering gene identification. In...Ch. 3.8 - 3.122 Drug testing in athletes. When Olympic...Ch. 3.8 - 3.85 Fingerprint expertise. A study published in...Ch. 3.8 - 3.86 Tests for Down syndrome. Currently, there are...Ch. 3.8 - HIV testing and false positives. Bayes’s rule was...Ch. 3.8 - 3.89 Mining for dolomite. Dolomite is a valuable...Ch. 3.8 - 3.90 Nondestructive evaluation. Nondestructive...Ch. 3.8 - 3.92 Intrusion detection systems. The Journal of...Ch. 3.8 - Confidence of feedback information for improving...Ch. 3.8 - 3.93 Forensic analysis of JFK assassination...Ch. 3 - Prob. 148UP Ch. 3 - Use the symbols ⋂, ⋃, |, and c to convert the...Ch. 3 - 3.95 A sample space consists of four sample...Ch. 3 - 3.97 A and B are mutually exclusive events, with P...Ch. 3 - 3.96 For two events A and B, suppose P (A) = .7, P...Ch. 3 - 3.99 Given that P (A∩B) = .4 and P (A|B) = .8,...Ch. 3 - 3.101 The Venn diagram below illustrates a sample...Ch. 3 - A fair die is tossed, and the up face is noted. If...Ch. 3 - A balanced die is thrown once. If a 4 appears, a...Ch. 3 - Two events, A and B, are independent, with P(A) =...Ch. 3 - Find the numerical value of 6! 0! Ch. 3 - Use the applet entitled Random Numbers to generate...Ch. 3 - Going online for health information. A...Ch. 3 - Study of ancient pottery. Refer to the Chance...Ch. 3 - Post office violence. The Wall Street Journal...Ch. 3 - Sterile couples in Jordan. A sterile family is a...Ch. 3 - 3.107 New car crash tests. Refer to the National...Ch. 3 - Selecting a sample. A random sample of five...Ch. 3 - Fungi in beech forest trees. The current status of...Ch. 3 - Do you have a library card? According to a Harris...Ch. 3 - Beach erosional hot spots. Beaches that exhibit...Ch. 3 - Chemical insect attractant. An entomologist is...Ch. 3 - Toxic chemical incidents. Process Safety Progress...Ch. 3 - Prob. 170ACI Ch. 3 - Winning at roulette. Roulette is a very popular...Ch. 3 - Cigar smoking and cancer. The Journal of the...Ch. 3 - Errors in estimating job costs. A construction...Ch. 3 - Elderly wheelchair user study. The American...Ch. 3 - Prob. 175ACI Ch. 3 - Prob. 176ACI Ch. 3 - Shooting free throws. In college basketball games,...Ch. 3 - Prob. 178ACI Ch. 3 - Prob. 179ACI Ch. 3 - Prob. 180ACI Ch. 3 - Prob. 181ACI Ch. 3 - 3.112 Monitoring quality of power equipment....Ch. 3 - Prob. 183ACI Ch. 3 - Dream experiment in psychology. A clinical...Ch. 3 - Prob. 185ACI Ch. 3 - Forest fragmentation study. Refer to the...Ch. 3 - Odds of winning a horse race. Handicappers for...Ch. 3 - Sex composition patterns of children in families....Ch. 3 - Finding an organ transplant match. One of the...Ch. 3 - 3.131 Chance of winning blackjack. Blackjack, a...Ch. 3 - Accuracy of pregnancy tests. Seventy-five percent...Ch. 3 - 3.130 Chance of winning at “craps.” A version of...Ch. 3 - The perfect bridge hand. According to a morning...Ch. 3 - Odd Man Out. Three people play a game called “Odd...Ch. 3 - 3.133 “Let’s Make a Deal.” Marilyn vos Savant, who...Ch. 3 - Most likely coin-toss sequence. In Parade...

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