Question

From Example 7.2 (application)

A mutual fund salesperson has arranged to call on 4 people tomorrow. Based on past experience the salesperson knows that there is a 20% chance of closing a sale on each call. Determine the probability distribution of the number of sales the salesperson will make.

Let S denote success, i.e. closing a sale P(S)=.20. Thus S^C is not closing a sale, and P(S^C)=.80

Q1) Draw probability tree

Q2) Construct the probability distribution table

Q3) Calculate the expected value

From Example 7.8

An investor has decided to form a portfolio by putting 35% of his money into McDonald’s stock and 65% into Cisco Systems stock. The investor assumes that the expected returns will be 10% and 5%, respectively, and that the standard deviations will be 12% and 22%, respectively.

a. Find the expected return on the portfolio.

b. Compute the standard deviation of the returns on the portfolio assuming that

(i) the two stocks’ returns are perfectly positively correlated

(ii) the coefficient of correlation is .5

(iii) the two stocks’ returns are uncorrelated

Answer 1