5.3 Financial application of Expected value and Variance

Question 1

When do you use the Financial Application for expected value and variance?

Answer 1

Joint prob for financial information

Question 2

Find expected value for financial application of x and y

Answer 2

f(x,y) x x(%return)

• do for each
• f(x,y) will be the same for each

Question 3

Find the variance for financial application of x and y

Answer 3

sum of (%-M)squared + (%-M)squared…..

Question 4

Find the standard deviation for financial applicaiton

Answer 4

• used to measure risk

- square root of the variance

Question 5

Portfolio application for expected value

Answer 5

r=50%(x) + 50%(y)

- called linear combination of the random variables of x and y

Question 6

Calculate the portfolio variance

Answer 6

Find covariance of X and Y 
1. find var(x) 
2. find var(y)
3. var(x) + var(y) 
Qxy = [var(x+y) - var(x)-var(y)]/2

Question 7

How do you compute the variance for a portfolio

Answer 7

.5 squared (var x) + .5 squared (var y)+ 2(.5)(.5)(Qxy)