Question

John, a stock market analyst tries to find out whether a secretive investor is increasing or decreasing her investment in a company by analyzing the change in trading volume between today and yesterday. The change, which can be positive or negative, is represented by a random variable C, in unit of million shares. The investment by the investor is represented by X, which assumes the value 0, 2, or 4 with equal probability. Moreover, John assumes the following approximation model: where is a normal random variable with mean 0 and variance ơ2-2. Let Ea be the event that x 4 be the event that X2 and Bo be the event that X = 0, John uses the following rule to guess the decision of the investor: if 3, John declares E4, if 3 > C2 1, E, otherwise Eo. (10pts) If the decision of the investor is detects it by using his rule. %, compute the probability that John correctly (10pts) If John declares that the investor has bought 4 million shares by using his rule, what is the probability that he is wrong? (5pts) Another model that describes the relation between C and X is

Answer 1

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