1108 words - 5 pages

Name: ______________________

BUAD 820

MID-TERM

EXAM I

There are a total of 5 questions.

Question 1 is mandatory.

Answer any, but only 3 of the remaining 4 questions.

Question 1 (has 5 parts)

1 Consider the data shown in the scatter plot below.

Which of the following statements is true about the correlation between X and Y.

a) X and Y are mildly, positively correlated

b) X and Y are perfectly, positively correlated

c) X and Y are mildly, negatively correlated

d) X and Y are perfectly, negatively correlated

e) X and Y are not correlated OR From the information given, we cannot tell whether X and Y are correlated

2 Five students from ...view middle of the document...

5 Which of the following best describes the data in the figure below? Base your answer on the appearance of the histogram. You do not need to do any calculations. Select just one statement below and complete it.

Histogram of bond prices at default, 1974-1995. (Source: Moody’s Investor Services)

(a) The mean is greater than the median because _____

(b) The median is greater than the mean because ____________________________

(c) The mean and the median are roughly the same because ________________________

Question 2

Elaine Benes is considering three possible ways to invest the $200,000 she has just inherited.

1. Some of her friends are considering financing a combined laundromat, video-game arcade, and pizzeria, where the young singles in the area can meet and play while doing their laundry. This venture is highly risky and could result in either a major loss or a substantial gain within a year. Elaine estimates that the chances of losing all the money (i.e. loss of $200,000) are 60%, while the chances of making a $200,000 profit are 40%.

2. She can invest in some new apartments that are being built in town. Within 1 year, this fairly conservative project will produce a profit of at least $10,000, but it might yield $20,000 or even $30,000. Elaine estimates the probabilities of these yields at 20%, 55%, and 25% respectively.

3. Elaine can invest in some private securities that have a current yield of 8.25%.

(a) On the next page, construct a decision tree for Elaine to decide how to invest her money. Which investment will maximize her expected 1-year profit?

(b) How much should she be willing to pay for perfect information about the success of the laundromat? Please answer this question in the space provided here.

(c) How much should she be willing to pay for perfect information about the success of the apartments? Please answer this question in the space provided here.

This page left intentionally blank – use it to draw (or paste) your decision tree and show your calculations

Question 3

The IRS has studied the frequency of errors in tax form B-7014, a two-page form. The probability of error on the first page is 0.1. Given that the first page has an error, the probability...

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