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Homework 8 Solutions
1
,
36
1
,
36
6
36
(1, 2)
(2, 2)
(3, 2)
(4, 2)
(5, 2)
(6, 2)
(1, 3)
(2, 3)
(3, 3)
(4, 3)
(5, 3)
(6, 3)
(1, 4)
(2, 4)
(3, 4)
(4, 4)
(5, 4)
(6, 4)
(1, 5)
(2, 5)
(3, 5)
(4, 5)
(5, 5)
(6, 5)
3
4
5
6
7
8
4
5
6
7
8
9
5
6
7
8
9
10
6
7
8
9
10
11
7
8
9
10
11
12
(1, 6)
(2, 6)
(3, 6)
(4, 6)
(5, 6)
(6, 6)
Cov(X, Y ) = E[XY ] E[X] E[Y ]. First note that E[Y ] = 0 by the usual
computations (or you can observe its possible values are symmetric, and the
1
probability is 36
for each case, hence the expected value must be 0). So that the
second term on the right hand side is 0. Next, we shall find XY , and compute its
expected value.
The possible values for X Y are:
0 3 8 15 24 35
3
0 5 12 21 32
8
5
0 7 16 27
15 12
7
0 9 20
24 21 16
9
0
11
35 32 27
20
11
0
You should quickly verify that E[XY ] = 0.
So that Cov(X, Y ) = 0 as claimed.
2. (a) Cov(X, Y ) = E[XY ] E[X] E[Y ]. Observe the following:
1
X=
1
1
Y =
1
if ball is even
if ball is odd
if ball is 0 or 00
if ball is even
if ball is odd
if ball is 0 or 00
1 if ball is even
XY =
1 if ball is odd
+1 if ball is 0 or 00
18
18
2
+ (1) 38
+ 1 38
= 34
.
38
38
18
2
2
E[X] = 1 18
+ (1) 38
+ (1) 38
= 38
.
38
18
18
2
2
E[Y ] = (1) 38 + 1 38 + (1) 38 = 38 .
So that Cov(X, Y ) = 34
2
2
= 0.8975.
38
38
38
1
X=
if
if
if
if
ball
ball
ball
ball
is
is
is
is
even
odd
0
00
1
Z=
35
if
if
if
if
ball
ball
ball
ball
is
is
is
is
even
odd
0
00
(+1)(1)
(1)(1)
XZ =
(1)(1)
(1)(+35)
if
if
if
if
ball
ball
ball
ball
is
is
is
is
even
odd
0
00
18
38
1
1
+ (1)(1) 18
+ (1)(1) 38
+ (1)(35) 38
= 17
.
38
19
2
.
E[X] = 38
18
18
1
1
2
E[Z] = (1) 38
+ (1) 38
+ (1) 38
+ 35 38
= 38
.
(+1)(1)
(1)(1)
XW =
(1)(35)
(1)(1)
if
if
if
if
ball
ball
ball
ball
is
is
is
is
even
odd, and 6= 1
1
0 or 00
2
We can show E[XW ] = 34
, and E[W ] = 38
. So that Cov(X, W ) = 324
.
38
361
(d)
(1)(1)
(+1)(1)
YW =
(+1)(+35)
(1)(1)
if
if
if
if
ball
ball
ball
ball
is
is
is
is
even
odd, and 6= 1
1
0 or 00
360
.
361
Var[0.2R1 + 0.8R2 ]
0.22 Var[R1 ] + 0.82 Var[R2 ] + 2 0.2 0.8 Cov(R1 , R2 )
0.22 0.04 + 0.82 0.09 + 2 0.2 0.8 0.2 0.2 0.3
0.06304
(c) We want w such that 0.12 = w 0.1 + (1 w) 0.15 = w = 53 , i.e. the desired
portfolio is 53 , 25 .
2
2
The variance is 35 Var[R1 ] + 52 Var[R2 ] + 2 35 25 Cov(R1 , R2 ) = 0.03456.
(d) We want w such that w2 Var[R1 ]+(1w)2 Var[R2 ]+2w (1w)Cov(R1 , R2 ) =
0.16. Solving yields two possible solutions:
w=
w=
4 211+39
.
53
4 21139
.
53
39
.
53