Exam 1

  1. Metainformation

    Tag Value
    fileProbability_uva-addition-rule-654-en_uva-addition-rule-654-en
    nameuva-addition-rule-654-en
    sectionProbability/Elementary Probability/General Rules/Addition rule
    typenum
    solution0.113
    tolerance0
    TypeCalculation
    LanguageEnglish
    LevelStatistical Literacy
    IRT-Difficulty2
    p-value0.5905

    Question

    Carla invests 30% of her funds in government bonds and 70% in a fund of common stocks. The return on an investment over a given period is the percentage change in price during this period. If X is the annual return of the government bonds is and Y is the annual return on stocks, then the return on the entire equity portfolio is R = 0.3X + 0.7Y.‖  From a data set (dataset) of the yield in its stock portfolio over the period from 1995 to 2010, you see below data on the expectation values, the standard deviations, and on the correlations between X and Y.  Based on this data, we have:

    ———————————————- —————- —————– X= annual government bond yield μX = 4.5% σX = 3.9% Y = annual return on equities μX = 14.2% σX = 18.2% Correlation between X and Y -0.12 ———————————————- —————- —————–

    What is the expected rate of return (μR) for Carla, expressed in percent?


    Solution

    The correct answer is: 0.113