Introductory Statistics (10th Edition)
10th Edition
ISBN: 9780321989178
Author: Neil A. Weiss
Publisher: PEARSON
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Chapter B.7, Problem 130E
Explain how multicollinearity can adversely affect the model building process in
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Problem 3. Pricing a multi-stock option the Margrabe formula
The purpose of this problem is to price a swap option in a 2-stock model, similarly as
what we did in the example in the lectures. We consider a two-dimensional Brownian
motion given by W₁ = (W(¹), W(2)) on a probability space (Q, F,P). Two stock prices
are modeled by the following equations:
dX
=
dY₁ =
X₁ (rdt+
rdt+0₁dW!)
(²)),
Y₁ (rdt+dW+0zdW!"),
with Xo
xo and Yo =yo. This corresponds to the multi-stock model studied in class,
but with notation (X+, Y₁) instead of (S(1), S(2)). Given the model above, the measure
P is already the risk-neutral measure (Both stocks have rate of return r). We write
σ = 0₁+0%. We consider a swap option, which gives you the right, at time T, to
exchange one share of X for one share of Y. That is, the option has payoff
F=(Yr-XT).
(a) We first assume that r = 0 (for questions (a)-(f)). Write an explicit expression for
the process Xt.
Reminder before proceeding to question (b): Girsanov's theorem…
Problem 1. Multi-stock model
We consider a 2-stock model similar to the one studied in class. Namely, we consider
=
S(1)
S(2)
=
S(¹) exp (σ1B(1) + (M1 - 0/1 )
S(²) exp (02B(2) + (H₂-
M2
where (B(¹) ) +20 and (B(2) ) +≥o are two Brownian motions, with
t≥0
Cov (B(¹), B(2)) = p min{t, s}.
"
The purpose of this problem is to prove that there indeed exists a 2-dimensional Brownian
motion (W+)+20 (W(1), W(2))+20 such that
=
S(1)
S(2)
=
=
S(¹) exp (011W(¹) + (μ₁ - 01/1) t)
롱)
S(²) exp (021W (1) + 022W(2) + (112 - 03/01/12) t).
where σ11, 21, 22 are constants to be determined (as functions of σ1, σ2, p).
Hint: The constants will follow the formulas developed in the lectures.
(a) To show existence of (Ŵ+), first write the expression for both W. (¹) and W (2)
functions of (B(1), B(²)).
as
(b) Using the formulas obtained in (a), show that the process (WA) is actually a 2-
dimensional standard Brownian motion (i.e. show that each component is normal,
with mean 0, variance t, and that their…
The scores of 8 students on the midterm exam and final exam were as follows.
Student
Midterm
Final
Anderson
98
89
Bailey
88
74
Cruz
87
97
DeSana
85
79
Erickson
85
94
Francis
83
71
Gray
74
98
Harris
70
91
Find the value of the (Spearman's) rank correlation coefficient test statistic that would be used to test the claim of no correlation between midterm score and final exam score. Round your answer to 3 places after the decimal point, if necessary.
Test statistic: rs =
Chapter B Solutions
Introductory Statistics (10th Edition)
Ch. B.1 - Regarding the regression of a response variable,...Ch. B.1 - Fill in the blanks. a. The assumption that all...Ch. B.1 - Answer true or false to each of the following...Ch. B.1 - Prob. 4ECh. B.1 - In each of Exercises B.5B.14, a. decide whether...Ch. B.1 - Prob. 6ECh. B.1 - Prob. 7ECh. B.1 - In each of Exercises B.5B.14, a. decide whether...Ch. B.1 - In each of Exercises B.5B.14, a. decide whether...Ch. B.1 - In each of Exercises B.5B.14, a. decide whether...
Ch. B.1 - In each of Exercises B.5B.14, a. decide whether...Ch. B.1 - Prob. 12ECh. B.1 - In each of Exercises B.5B.14, a. decide whether...Ch. B.1 - In each of Exercises B.5B.14, a. decide whether...Ch. B.1 - Consider the scatterplot of y versus x in Output...Ch. B.1 - Consider the scatterplot of y versus x in Output...Ch. B.1 - Prob. 17ECh. B.1 - Prob. 18ECh. B.1 - If one or both of the assumptions of...Ch. B.1 - Prob. 20ECh. B.1 - Prob. 21ECh. B.1 - Prob. 22ECh. B.1 - Prob. 23ECh. B.1 - Gasoline Mileage Ratings. Gasoline mileage and...Ch. B.1 - Hip Fracture Rates. In the paper Very Low Rates of...Ch. B.1 - Prob. 26ECh. B.1 - Prob. 27ECh. B.1 - Prob. 28ECh. B.1 - Prob. 29ECh. B.1 - Gasoline Mileage Ratings. Refer to Exercise B.24,...Ch. B.1 - Hip Fracture Rates. Refer to Exercise B.25, where...Ch. B.1 - Drosophila Life-span. In the paper Extended...Ch. B.1 - Protein Content of Wheat. In their text, Methods...Ch. B.1 - Pine Tree Volume. Table B.2 on page B-5 provides...Ch. B.2 - Give an example of a. a second-degree polynomial...Ch. B.2 - In the polynomial regression equation y = 8 + 3x ...Ch. B.2 - Answer true or false to each of the following...Ch. B.2 - Explain why it is difficult to interpret the...Ch. B.2 - Fill in the blanks. a. A predictor variable is...Ch. B.2 - Answer true or false to each of the following...Ch. B.2 - Refer to the scatterplots in Outputs B.32(a) and...Ch. B.2 - Fill in the blanks. a. In the _______ method for...Ch. B.2 - Answer true or false to each of the following...Ch. B.2 - Stopping Distance. In their text Methods of...Ch. B.2 - Hour of Birth. In the paper increased Frequency of...Ch. B.2 - Silica Gel. Silica gel is a substance that absorbs...Ch. B.2 - Note: The data for the Using Technology exercises...Ch. B.2 - Hour of Birth. Refer to Exercise B.45, where the...Ch. B.2 - Silica Gel. Refer to Exercise B.46, where the...Ch. B.2 - Gasoline Mileage Ratings. Refer to Exercise B.24...Ch. B.2 - Protein Content of Wheat. Refer to Exercise B.33...Ch. B.2 - Satellite Orbits. Each issue of the magazine Ad...Ch. B.2 - Pine Tree Volume. In Example B.6 on page B-4, we...Ch. B.3 - Explain the difference between a quantitative...Ch. B.3 - In predicting a person's income, identify two...Ch. B.3 - In predicting the change in blood pressure for...Ch. B.3 - Fill in the blanks. a. A ___ predictor variable is...Ch. B.3 - Prob. 59ECh. B.3 - Answer true or false to each of the following...Ch. B.3 - For the regression equation y = 15 + 2x1 + 4x2 ...Ch. B.3 - Refer to Exercise B.61: a. Do the slopes of the...Ch. B.3 - Consider the regression equation y = 0 + 1 x1+ 2x2...Ch. B.3 - Prob. 64ECh. B.3 - Prob. 65ECh. B.3 - Prob. 66ECh. B.3 - Home Sale Prices. Refer to Example B.18 on page...Ch. B.3 - Mental Tasks and Drugs. In the text Statistical...Ch. B.3 - Gasoline Mileage Ratings. Refer to Exercise B.66...Ch. B.3 - Home Sale Prices. Refer to Exercise B.67 regarding...Ch. B.3 - Mental Tasks and Drugs. Refer to Exercise B.68...Ch. B.3 - Hip Fracture Rates. Refer to Exercise B.25 on page...Ch. B.3 - Television Viewing. The results of a study on...Ch. B.3 - Glue Strength. In the text Quality Control and...Ch. B.4 - Explain why the interpretation of the regression...Ch. B.4 - Answer true or false to each of the following...Ch. B.4 - Explain what is meant by multicollinearity.Ch. B.4 - Fill in the blanks. a. Consider a regression model...Ch. B.4 - Prob. 79ECh. B.4 - Prob. 80ECh. B.4 - Fill in the blanks. a. If predictor variable x1...Ch. B.4 - Answer true or false to each of the following...Ch. B.4 - State four ways to detect the presence of...Ch. B.4 - Prob. 84ECh. B.4 - Prob. 85ECh. B.4 - Prob. 86ECh. B.4 - Prob. 87ECh. B.4 - Prob. 88ECh. B.4 - Graduation Rates. Refer to Exercise B.86, where we...Ch. B.4 - Prob. 90ECh. B.4 - Gasoline Mileage Ratings. Refer to Exercise B.84,...Ch. B.4 - Graduation Rules. Refer to Exercise B.86, where we...Ch. B.5 - Explain what is meant by the variable selection...Ch. B.5 - Prob. 94ECh. B.5 - Fill in the blanks. a. In the forward selection...Ch. B.5 - Prob. 96ECh. B.5 - Answer true or false to each of the following...Ch. B.5 - Prob. 98ECh. B.5 - Prob. 99ECh. B.5 - Prob. 100ECh. B.5 - Prob. 101ECh. B.5 - Suppose that x1, x2, x3, and x4 are predictor...Ch. B.5 - Prob. 103ECh. B.5 - Graduation Rates. Refer to Exercise B.92 on page...Ch. B.5 - Home Sale Prices. In Example B. 18 on page B-67,...Ch. B.5 - Home Sale Prices. In Example B.18 on page B-67, we...Ch. B.5 - Infant Mortality Rates. In the article Children's...Ch. B.6 - Consider a multiple linear regression relating the...Ch. B.6 - Prob. 109ECh. B.6 - Prob. 110ECh. B.6 - Answer true or false to each of the following...Ch. B.6 - Explain the similarities and differences between...Ch. B.6 - Fill in the blanks. a. In the Mallows Cp...Ch. B.6 - Answer true or false to each of the following...Ch. B.6 - Gasoline Mileage Ratings. Refer to Exercise B.84...Ch. B.6 - Advertising and Sales. Refer to Exercise B.85 on...Ch. B.6 - Graduation Rates. Refer to Exercise B.86 on page...Ch. B.6 - Suppose that x1, x2, x3, and x4 are predictor...Ch. B.6 - Suppose that x1 x2, x3, and x4 are predictor...Ch. B.6 - Gasoline Mileage Ratings. Refer to Exercise B.91...Ch. B.6 - Graduation Rates. Refer to Exercise B.92 on page...Ch. B.6 - Home Sale Prices. Refer to Exercise B.105 on page...Ch. B.6 - Body Fat. Refer to Exercise B.106 on page B-143,...Ch. B.6 - Infant Mortality Rates. Refer to Exercise B.107 on...Ch. B.7 - List six problems that can arise in the collection...Ch. B.7 - Prob. 126ECh. B.7 - Prob. 127ECh. B.7 - Give an example of how a nonrepresentative sample...Ch. B.7 - Discuss the effect on a regression analysis of not...Ch. B.7 - Explain how multicollinearity can adversely affect...Ch. B.7 - Briefly describe what is meant by the problem of...Ch. B.7 - Answer true or false to each of the following...Ch. B.7 - Prob. 133ECh. B.7 - Discuss the advantages of using data collected...Ch. B.7 - Describe the potential effects of outliers on...Ch. B.7 - Prob. 136ECh. B.7 - Regarding regression analysis: a. What assumptions...Ch. B.7 - Answer true or false to each of the following...Ch. B.7 - Answer true or false to each of the following...Ch. B.7 - Discuss what G. E. P. Box might have meant when he...Ch. B.7 - Regarding model validation in regression: a. What...Ch. B - Explain what is meant when we say that a nonlinear...Ch. B - Answer true or false to the following statements...Ch. B - Prob. 3RPCh. B - Prob. 4RPCh. B - Answer true or false to each of the following...Ch. B - Paper Strength. In their text, Introduction to...Ch. B - Answer true or false to each of the following...Ch. B - Prob. 8RPCh. B - Explain what is meant when we say that a...Ch. B - OUTPUT B.95 Output for Problem 10 Regression...Ch. B - In regressing a response variable on several...Ch. B - Answer true or false to each of the following...Ch. B - Fill in the blanks. a. Multicollinearity is...Ch. B - Prob. 14RPCh. B - Explain why selecting a regression equation using...Ch. B - Answer true or false to each of the following...Ch. B - Fill in the blanks. a. In the _____ method, we...Ch. B - Patent Production. In the report The State New...Ch. B - Prob. 19RPCh. B - Prob. 20RPCh. B - Patent Production. Refer to Problem 18. where we...Ch. B - Prob. 22RPCh. B - Prob. 23RPCh. B - What are the possible consequences of the presence...Ch. B - Windmill Output. Refer to Problem 3, where we...Ch. B - Paper Strength. Refer to Problem 6, where we...Ch. B - Diabetes. Refer to Problem 10, where we considered...Ch. B - Hospital Stalling. Refer to Problem 14, where we...Ch. B - Patent Production. Refer to Problem 18, where we...Ch. B - Patent Production. Refer to Problem 29, where we...Ch. B - Recall from Chapter 1 of your text that the Focus...Ch. B - At the beginning of this module on page B-l, we...
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