02 ASSIGNMENT Quantitative

3.
In 38 of the 60 years from 1950 through 2009, the S&P 500 finished higher after the first five
days of trading. In 33 of those 38 years, the S&P 500 finished higher for the year. Is a good first
week a good omen for the upcoming year? The following table gives the first week and annual
performance over this 60-year period:
S&P 500’s ANNUAL PERFORMANCE

FIRST WEEK Higher Lower
Higher 33 5 38
Lower 11 11 22
44 16
a. If a year is selected at random, what is the probability that the S&P 500 finished higher for
the year?
P [ Higher (Annual) ] = 44/60
b. Given that the S&P 500 finished after the first five days of trading, what is the probability
that it finished higher for the year?
P [ Higher (Annual) ] = 33/38
c. Are the two events “first-week-performance” and “annual performance” independent?

P [ Higher (Annual) l Higher (First week) ≠ P [ Higher (Annual) ]
“Annual performance” is not independent of “first week performance”
From an intuitive perspective, the probability of finishing higher for the year is greater
when S&P finished higher on the first week. Thus, the “annual performance” is not
independent of the first-week performance.
4. The probability that a person has a certain disease is 0.03. Medical diagnostic tests are available
to determine whether the person actually has the disease. If the disease is actually present, the
probability that the medical diagnostic test will give a positive result (indicating that the disease
is present) is 0.90. If the disease is not actually present, the probability of a positive test result
(indicating that the disease is present) is 0.2. Suppose that the medical diagnostic test has given
a positive result (indicating that the disease is present).
SOLUTION:
Let: event D = has disease event T = test is positive
Event D1 = no disease event T1 = test is negative
Given: P(D) = 0.03 P(T|D) = 0.90

P(D1) = 0.97 P(T|D1) = 0.02
a. What is the probability that the disease is actually present?
The probability that the disease is 0.5818 or 58.18%
P (T |D )∗P ( D )
P(T|D) =
P ( T |D )∗P ( D ) + P ( T|D 1 )∗P ( D1 )
(0.90)(0.03)
=(
0.90 ) ( 0.03 )+(0.02)(0.97)
0.0270
= 0.0270+0.0194
0.0270
= 0.0464
= 0.5818
b. What is the probability of a positive test result?
The probability of a positive test result is 0.0464 or 4.64%
Tabular
Event D P(D) P(T|D) P(T|D)*P(D)
D = has disease 0.03 0.90 0.0270
D1 = no disease 0.97 0.02 0.0194
TOTAL 1 0.92 0.0464
Decision Tree
P(D and T) = P(T|D)*P(D)

= 0.90*0.03 = 0.0270
P(D) = 0.03
P(D and T1) = P(T1|D)*P(D)

= .010*0.03 = 0.0030
P(D1 and T) = P(T|D1)*P(D1)

= 0.90*0.03 = 0.0194
P(D1) = 0.97
P(D1 and T1) = P(T1|D1)*P(D1)
= 0.98*0.97 = 0.9506
5. An advertising executive is studying television-viewing habits of married couples during prime-
time hours. Based on past viewing records he has determined that during prime time husbands
are watching television 60% of the time. It has also been determined that when the husband is
watching television, 40% of the time the wife is also watching. When the husband is not watching
television, 30% of the time the wife is watching television.
Find the probability that: P(H) = 0.6 P(W|H) = 0.4 P(W|NH) = 0.3
a. Find the probability that if the wife is watching television, the husband is also watching.
Solution:
P(H|W) = 0.6*0.4/(0.6*0.4+0.4*0.3) = 0.24/0.36 = 2/3
Answer: If the wife is watching television, the husband is also watching television.
b. Find the probability that the wife is watching television during prime time.
Solution:
P(W|H) = P(H and W)/P(H)
P(H and W) = 0.4*0.6=0.24
P(H|W) = P(H and W)/P(W)
P(W) = 0.24/0.67= 0.36
Answer: The wife is watching television during prime time.
6. Olive Construction Company is determining whether it should submit a bid for a new shopping
center. In the past, Olive’s main competitor, Base Construction Company, has submitted bids 70%
of the time. If Base Construction Company does not bid on a job, the probability that Olive
Construction Company will get the job is 0.50. If Base Construction Company bids on a job, the
probability that Olive Construction Company will get the job is 0.25. a. If Olive Construction
Company gets the job, what is the probability that Base Construction Company did not bid? b.
What is the probability that Olive Construction Company will get the job?
a. If Olive Construction Company gets the job, what is the probability that Base Construction
Company did not bid?
 P(B) = 0.7
 P(B*) = 1- 0.7 = .3
 P(B*O*)= (.3) (.5) = .15
There is 15% probability that Base Construction did not bid.

b. What is the probability that Olive Construction Company will get the job?
 P(B *O*)= (0.70) (0.25) = .175
 P(B *O*)= (0.30) (0.50) = .155
 .175 + .155
 .325
There is 32.5% probability that Olive construction will get the job.
7. The editor of a textbook publishing company is trying to decide whether to publish a proposed
business statistics textbook. Information on previous textbooks published indicates that 10% are
huge successes, 20% are modest successes, 40% breakeven and 30% are losers. However, before
a publishing decision is mad, the book will be reviewed. In the past, 99% of the huge successes
received favorable reviews, 70% of the moderate successes received favorable reviews, 40% of
the break-even books received favorable reviews, and 20% of the losers received favorable
reviews.
a. If the proposed textbook received a favorable review, how should the editor revise the
probabilities of the various outcomes to take this information into account?
P(S) = 0.10 P(F/S) = 0.99

P(M) = 0.20 P(F/M) = 0.70
P(E) = 0.40 P(F/E) = 0.40
P(L) = .30 P(F/L) = 0.20
P( S │ F)=( P( F │ S)P( S))/(∑ ▒ 〖 P( F │ ∙) P(∙)〗)
P( S │ F)=(.99)(.10)¿/¿
P(S/F) = 0.2157
P(M/F) = 0.3050
P(E/F) = 0.3486
P(L/F) = 0.1307
b. What proportion of textbooks receives favorable reviews?
Σ P ( F|⋅ ) P ( ⋅ )
=0.459
8. A municipal bond service has three rating categories (A, B, and C). Suppose that in the past year,
of the municipal bonds issued throughout the United States, 70% were rated A, 20% were rated B,
and 10% were rated C. Of the municipal bonds rated A, 50% were issued by cities, 40% by
suburbs, and 10% by rural areas. Of the municipal bonds rated B, 60% were issued by cities, 20%
by suburbs, and 20% by rural areas. Of the municipal bonds rated C, 90% were issued by cities, 5%
by suburbs, and 5% by rural areas.
Given info:
 P(A) – 0.70
 P(B) – 0.20
 P(C) – 0.10
 P(CITIES|A) – 0.50
 P(SUBURB|A) – 0.40
 P(RURAL|A) – 0.10
 P(CITIES|B) – 0.60
 P(SUBURB|B) – 0.20
 P(RURAL|B) – 0.20
 P(CITIES|C) – 0.90
 P(SUBURB|C) – 0.05
 P(RURAL|C) – 0.05
a. If a new municipal bond is to be issued by a city, what is the probability that it will receive
an A rating?
ANS. = 0.70
b. What proportion of municipal bonds are issued by cities?
ANS. = 0.50
c. What proportion of municipal bonds are issued by suburbs?
ANS. = 0.325

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3.

S&P 500’s ANNUAL PERFORMANCE

c. Are the two events “first-week-performance” and “annual performance” independent?

Given: P(D) = 0.03 P(T|D) = 0.90

P(D and T) = P(T|D)*P(D)

P(D and T1) = P(T1|D)*P(D)

P(D1 and T) = P(T|D1)*P(D1)

There is 15% probability that Base Construction did not bid.

P(S) = 0.10 P(F/S) = 0.99

P( S │ F)=( P( F │ S)P( S))/(∑ ▒ 〖 P( F │ ∙) P(∙)〗)

b. What proportion of textbooks receives favorable reviews?

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