1. After Hurricane Katrina, Congress mandated that hurricane protection for New Orleans be improved to a once-in-a-100-years standard, meaning that there is only a 1/100 probability of failing in any given year. Suppose you take out a30-year mortgage to buy a home in this area. If the probability of failing is 1/100, assuming independence, what is the probability of at least one failure in the next 30 years?

2. Explaining why he was driving to a judicial conference in South Dakota, the chief justice of the West Virginia State Supreme Court said “I’ve flown a lot in my life. I’ve used my statistical miles. I don’t fly except when there is no viable. What do you suppose the phrase used my statistical miles means? Explain why you either agree or disagree with the judge’s reasoning.

3. The annual returns on US corporate stock and US Treasury bonds over the next

12 months are uncertain. Suppose that these returns can be described by normal distributions with US corporate stock having a mean of 15 percent and standard deviation of 20 percent, and US Treasury bonds having a mean of 6 percent and standard deviation of 9 percent. Which asset is more likely to have a negative return? Explain your reasoning.

Answer rating: 100% (QA)

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