Asasa

Faculty of Business

City University of Hong Kong

EF5070 Econometrics

Semester A 2009-2010

Dr. Isabel Yan

Assignment 1 (Total: 45 points)

Note:

1. Due Sept 24 (for Thur session) and Sept 26 (for Sat session) at the beginning of class

2. Write down your full name and student ID number

3. Please write down all your steps in deriving the answers

4. For the computer exercises, you do not need to print out all the computer output. You just need to report the results that are explicitly asked for in the questions

Review of Probability Distribution, Population Mean and Variance

1. (total 10 points)

The following table shows the expectation of the Federal Fund rate for the Sept 19, 2008 FOMC meeting.[1] [pic]

|Interest rate, [pic] |Probability, [pic] |

|Hike to 2.75% |0.097 |

|Hike to 2.5% |0.518 |

|Hike to 2.25% |0.353 |

|No change: 2% |0.032 |

|Cut 25 basis point to 1.75% |0 |

a) Sketch the graph of the probability distribution of X. (3 points)

b) What is the expected value of X? (3 points)

c) What are the variance and standard deviation of X? (4 points)

Covariance and Correlation

2. (total 10 points)

Suppose you are currently investing in HSBC. Your broker tells you not to put all your eggs in one basket and suggests you to diversify your investment risk by putting half your investment in the China Light and Power Company(CLP). The following table shows a sample of the annual returns to HSBC (X) and CLP (Y) for the last eight months.

|Year |Monthly returns of HSBC, |Monthly returns of China Light and Power (CLP), [pic] (in %)...