There are 5 companies, each sells a bond that will pay $20 in one month. For each company the bond costs $10. All of these companies have probability .01 of default, and whether one defaults is independent from whether any of the others default. a) Let X be the number of companies that default. What is the distribution of X? What is the expected value of X? What is the variance of X? b) Consider two portfolios. In portfolio I, we buy one bond from each of these companies. In portfolio II, we buy 5 bonds from one of these companies. How much does portfolio I cost? How much does portfolio II cost?
There are 5 companies, each sells a bond that will pay $20 in one month. For each company the bond costs $10. All of these companies have probability .01 of default, and whether one defaults is independent from whether any of the others default. a) Let X be the number of companies that default. What is the distribution of X? What is the expected value of X? What is the variance of X? b) Consider two portfolios. In portfolio I, we buy one bond from each of these companies. In portfolio II, we buy 5 bonds from one of these companies. How much does portfolio I cost? How much does portfolio II cost?
Calculus For The Life Sciences
2nd Edition
ISBN:9780321964038
Author:GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.
Publisher:GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.
Chapter12: Probability
Section12.CR: Chapter 12 Review
Problem 14CR
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