Every week we start at Monday and close at Thursday

For continuous random variable, the probability that x is equal to a constant value is always zero, you
can only say x is larger or smaller than a certain value

var(a + cX) = {(a+cx) - E(a+cx)}2 * f(x) = c 2 var(X)

Class exercise:
Question 1: What is a discrete random variable? Illustrate your answer with an example.

A discrete random variable can take only a finite number of values that can be counted by using
the positive integers:
Ex: number of black cards in a card deck: 26/52
Probability of stock going up in 5 straight days (if per day is like coin)
Question 2: What is a continuous random variable? Illustrate your answer with an example.

A continuous random variable can take any real value (not just whole numbers) in at least one
interval on the real line.
Ex: company earnings, company costs
Question 3: Let pt represents the stock price at time t. For t=0,1,2,3, p={23, 18, 21, 16, 27}.
(a) Calculate the stock returns.
T
P
rt
R1=(P1/P0 - 1)
0
23
This is call simple returns
1
18
R1=(P1/P0 - 1)=18/23 - 1=0.217391
discrete returns
2
21
3
16
R1= ln (P1/P0 )
4
27
This is call continuous returns
(we dont use this return in
this class)
(b) Calculate the sample mean of the stock returns.
(c) Calculate the sample variance of the stock returns.
(d) Calculate the standard deviation of the stock returns.

Question 4: Let p1t and p2t represent the stock prices of Stocks 1 and 2 at time t. For t=0,1,2,3,
p1={23, 18, 21, 16, 27} and p2={56, 62, 67, 64, 65}
(a) Calculate the sample covariance of the stock returns.
(b) Calculate the correlation of the stock returns.
Question 5: Let p1t and p2t represent the stock prices of Stocks 1 and 2 at time t. For t=0,1,2,3,
p1={23, 18, 21, 16, 27} and p2={56, 62, 67, 64, 65}. An investor has a portfolio consisting of 1 share
of Stock 1 and 1 share of Stock 2. This is a buy and hold portfolio.
(a) Calculate the portfolio returns.
(b) Calculate the sample mean of the portfolio returns.
(c) Calculate the sample variance of the portfolio returns.
(d) Calculate the standard deviation of the portfolio returns.

Question 6: Let p1t and p2t represent the stock prices of Stocks 1 and 2 at time t. For t=0,1,2,3,
p1={23, 18, 21, 16, 27} and p2={56, 62, 67, 64, 65}. An investor has a portfolio consisting of 14
shares of Stock 1 and 28 shares of Stock 2. This is a buy and hold portfolio.
(a) Calculate the portfolio returns.
(b) Calculate the sample mean of the portfolio returns.
(c) Calculate the sample variance of the portfolio returns.
(d) Calculate the standard deviation of the portfolio returns.
Question 7: Let p1t and p2t represent the stock prices of Stocks 1 and 2 at time t. For t=0,1,2,3,
p1={23, 18, 21, 16, 27} and p2={56, 62, 67, 64, 65}. An investor has a portfolio consisting of 50
percent in Stock 1 and 50 percent in Stock 2. This is a constant proportion portfolio.
(a) Calculate the portfolio returns.
(b) Calculate the sample mean of the portfolio returns.
(c) Calculate the sample variance of the portfolio returns.
(d) Calculate the standard deviation of the portfolio returns.
Question 8: Let p1t and p2t represent the stock prices of Stocks 1 and 2 at time t. For t=0,1,2,3,
p1={23, 18, 21, 16, 27} and p2={56, 62, 67, 64, 65}. An investor has a portfolio consisting of 40
percent in Stock 1 and 60 percent in Stock 2. This is a constant proportion portfolio.
(a) Calculate the portfolio returns.
(b) Calculate the sample mean of the portfolio returns.
(c) Calculate the sample variance of the portfolio returns.
(d) Calculate the standard deviation of the portfolio returns.