SOLUTIONS: AB103 Final Examination Semester 1, 2008-2009

Question 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. (A) (C) (B) (C) (D) (A) (D) (B) (E) (B)

Question 2 The following decision variables are defined: Li = Amount invested in Lieman MiniBonds at the beginning of year i = 1, 2, 3, 4 Mi = Amount invested in Merry and Link Bonds at the beginning of year i = 1, 2, 3, 4 F2 = Amount invested in Far East Bonds at the beginning of year 2 A4 = Amount invested in American Bonds at the beginning of year 4 MMi = Amount invested in money market funds at the beginning of year year i = 1, 2, 3, 4 X = Amount accumulated at the beginning of Year 5 Maximize X The following constraints are defined: Beginning of Year 1 L1 + M1 + MM1 Beginning of Year 2 L2 + M2 + F2 + MM2 Beginning of Year 3 L3 + MM3 Beginning of Year 4 A4 + MM4 Beginning of Year 5 X = = = = = 150000 1.02MM1 1.02MM2 + 1.15L1 1.02MM3 + 1.15L2 + 1.25M1 1.02MM4 + 1.15L3 + 1.25M2 + 1.30F2 + 1.10A4

Note: Variables M3, L4 and M4 are not included as they will not impact the solution. Question 3 a. Optimal decision is to choose FD. Expected returns 2500
No Research 0.40 EQ EQ FD 10000.00 2500.00 10000.00 0.60 4000.00 2500.00 2500.00

1600.00 2500.00

2500.00 5500.00 3000.00

EVwPI EVPI

EVPI = $3000 Since the research costs $500 < EVPI, a priori it might be worthwhile to conduct research. Also see Decision Tree. b. Revised Probabilities
P(Sj) 0.40 0.60 P(Ik|Sj) I1 I2 0.60 0.40 0.20 0.80 P(Ik Sj) I1 I2 0.24 0.16 0.12 0.48 0.36 0.64 P(Sj | Ik) I1 I2 0.67 0.25 0.33 0.75

S1 S2

I1 EQ FD

S1 0.67 10000.00 2500.00

S2 0.33 4000.00 2500.00

5380.00 2500.00

I2

S1 0.25 EQ FD 10000.00 2500.00

S2 0.75 4000.00 2500.00

-500.00 2500.00

I1 0.36 5380.00

I2 0.64 2500.00

3536.80

Also See Decision Tree EV with MR (after accounting for cost of research) = 3536.8-500 = 3036.8 Since this is greater than the EV without MR, optimal strategy is to conduct research. Also see decision tree. If I1 choose EQ If I2 choose FD EVSI = EVwSI EV without SI = 3536.8 - 2500 = 1036.8. Note: 1. It is okay to work with alternate payoffs e.g., $10,000 + Returns or % returns. Question 4 (a)

(i)

H 0 : A = B against H1: A B Under H 0 the test statistic t = XA XB

2 SA S2 + B nA nB

~ t where =

(s (s
2 A

2 2 A / n A + sB

/ nB
2 B

/ nA

n A 1

) +(s
2

/ nB

nB 1

( 6.25 / 16 +8.69 / 14 )2 ( 6.25 / 16 ) + ( 8.69 / 14 ) 16 1 14 1

2 2

= 25.6923 26 Calculated t = 11.7 14.9 = 3.182 6.25 8.69 + 16 14 As the calculated t = 3.182 < t26 ,.025 = 2.056 , we reject H 0 at =0.05

and conclude that the average profits generated by staff under the two training programs are different.
6 marks
2 sA s2 + B nA nB

( ii )

95% confidence interval for A B : x A xB t26 ,.025

= 11.7-14.9 2.056 = ( 5.268, 1.132 )

6.25 8.69 + 16 14

2 marks (iii) In hypothesis testing in (i) with two sided alternative hypothesis and CI in (ii) both we used =0.05. Hence our conclusion in (i) must be consistent

with the results in (ii), i.e., reject H0 as 0 ( 5.268, 1.132 )

2 marks

(b) ( i ) H 0 : The propotion of patients with congestive heart failure and alcohol consumption
are independent. H1 : The propotion of patients with congestive heart failure and alcohol consumption are not independent. Under H 0 the test statistic 2 = Calculated 2 =

( f ij eij ) 2 eij

~ 2 with 2 df.

131.6132 273.8484 2 As the calculated ( = 10.197) > 2..01 ( = 9.210 ) we reject H 0 at =0.01 and coclude
2

(146 131.6132 ) + K + ( 292 273.8484 ) = 10.197

that the propotion of patients with congestive heart failure and alcohol consumption are not independent.
6 marks

( ii )

Let pm denotethe population proportion of moderate drinkers. 95% confidence interval for pm : pm z.025 m pm q n

( 696 / 1913)(1 696 / 1913) 696 1.96 1913 1913 = ( 0.342 , 0.385 )
=
3 marks

We are 95 % confident that the true proportion of moderate drinkers will be in the interval (0.342, 0.385)
1 mark

Question 5 (a)
ANOVA(b)

Model 1

Sum of Squares Regression Residual Total 30781779.116 13317116.157 44098895.273

df 3 18 21

Mean Square 10260593.039 739839.786

F 13.869

Sig. .000(a)

a Predictors: (Constant), x3, x1, x2 b Dependent Variable: y

(b)

2 Adjusted Ra = 1

SSE / (n k 1)

( y y ) / ( n 1)
2 i

= 1

13317116.157 / (22 3 1) = 1 0.352 = 64.7% 44098895.273 / ( 21)

2 marks

This implies that the fitted model has explained 64.7% of the total sample variation in y values, after adjusting for the sample size and the number of independent variables in the model. 1 mark

(c)

H0: 1 = 2 = 3 = 0 against H1: At least one of 1, 2 and 3 not equal to 0. 1 mark MSR The test statistic F = ~ Fk ,n k 1 where n=22 and k =3. MSE MSR Calculated F = = 13.869 MSE 2 marks
The calculated F= 13.869 > F.05, 3, 18=3.16 and we conclude that at least one of the three variables x1, x2 and x3 are useful for predicting y. 1 mark (d) H0: 1 = 0 against H1: 1 0.

Under H 0 The test statistic t =

1 ~t where n=22 and k =3. ) n k 1 se( 1 1 mark

Calculated t =

22.861 = 1.25 18.293 1 mark

P value = 2 P ( t18 > 1.25 ) > 0.2 As the p-value is very large, we fail to reject H 0 for any <0.2. This means x1 is not useful in predicting the net profit of the company. 2 marks (e) (i) For the model Y = 0 + 1 x1 + 2 x2 + 3 x3 + the computed Adj R2 =64.7 and for the model Y = 0 + 2 x2 + 3 x3 + Adj R2 =63.7%. As the increase in the Adj R2 is negligible, we prefer the second model without x1 . 2 marks The average difference is $2689 (in $1000s) 2 marks
5

(ii)

(iii)

95% CI for the average difference: t se

2 18 ,.025

( )
2

= 2689 2.101( 471.345 ) = (1698.7042 ,3679.2958 ) 2 marks