Hedge funds are institutions that invest in a wide variety of instruments, from stocks and bonds to commodities and real estate. One of the reasons for the success of this industry is that it manages expected return and risk better than other financial institutions. Using the concepts and ideas described in this chapter, discuss how a hedge fund might maximize expected return and minimize risk by investing in various financial instruments. Include in your discussion the concepts of means and variances of linear composites of random variables and the concept of independence.
Answer to relevant QuestionsFind the following probabilities: P(-1 < Z < 1), P(-1.96 < Z < 1.96), P (-2.33 < Z < 2.33). Find two values of the standard normal random variable, z and – z, such that the two corresponding tail areas of the distribution add to 0.01. Let X be a normally distributed random variable with mean µ = 16 and standard deviation σ = 3. Find P(11 < X < 20). Also find P(17 < X < 19) and P(X > 15). A manufacturing company regularly consumes a special type of glue purchased from a foreign supplier. Because the supplier is foreign, the time gap between placing an order and receiving the shipment against that order is ...Let X be a normally distributed random variable with mean 600 and variance 10,000. Find two values x1 and x2 such that P(X > x1) = 0.01 and P(X < x2) = 0.05.
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