MATHEMATICS AND STATISTICS FOR ECONOMICS AND FINANCE

(MATH CAMP, FALL 2018)

STATISTICS PROBLEM SET 1

GAUTAM TRIPATHI

Basic probability calculations

problems from the de groot and schervish text

3.1.2, 3.2.4, 3.2.8.

additional problem 1
(i) Give an example of an event E such that E is not empty, but Pr(E) = 0.
(ii) Give an example of an event F such that F is not the sample space, but Pr(F ) = 1.

additional problem 2
Let A, B denote events of the sample space Ω. State with brief explanation whether the
following statements are true or false.
(i) Pr(A) = 0 =⇒ Pr(A ∪ B) = Pr(B).
(ii) Pr(A) = 0 =⇒ Pr(A ∩ B) = 0.
(iii) Pr(A) = 1 =⇒ Pr(A ∪ B) = 1.
(iv) Pr(A) = 1 =⇒ Pr(A ∩ B) = Pr(B).

additional problem 3
Let X, Y be random variables and c, d ∈ R. Show that:
(i) E[(X − EX)/ sd(X)] = 0 and var[(X − EX)/ sd(X)] = 1.
(ii) var(X) = EX 2 − (EX)2 .
(iii) var(c1 + c2 X) = c22 var(X).
(iv) cov(X, Y ) = EXY − (EX)(EY ).
(v) cov(X + c, Y + d) = cov(X, Y ).
(vi) cov(c1 X1 + c2 X2 , d1 Y1 + d2 Y2 ) = c1 d1 cov(X1 , Y1 ) + c1 d2 cov(X1 , Y2 ) + c2 d1 cov(X2 , Y1 ) +
c2 d2 cov(X2 , Y2 ).
Solution (vi): Without loss of generality (why?), assume that EX1 = EX2 = EY1 = EY2 = 0.

Due: September 21, 2018.

1
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Define the vectors c := (c1 , c2 )2×1 , d := (d1 , d2 )2×1 , X := (X1 , X2 )2×1 , and Y := (Y1 , Y2 )2×1 .
Then,

cov(c1 X1 + c2 X2 , d1 Y1 + d2 Y2 ) = cov(c0 X, d0 Y )
:= E(c0 X)(d0 Y ) (EX = EY = 0)
0 0
= E(c X)(Y d)
= c0 (EXY 0 )d
 
0 X1 Y1 X1 Y2
=cE d
X2 Y1 X2 Y2
 
EX1 Y1 EX1 Y2
= c0 d
EX2 Y1 EX2 Y2
 
0 cov(X1 , Y1 ) cov(X1 , Y2 )
=c d
cov(X2 , Y1 ) cov(X2 , Y2 )
= c1 d1 cov(X1 , Y1 ) + c1 d2 cov(X1 , Y2 )
+ c2 d1 cov(X2 , Y1 ) + c2 d2 cov(X2 , Y2 ).

Pn
(vii) If X1 , . . . , Xn is a collection of identically distributed random variables and X̄ := i=1 Xi /n,
then EX̄ = EX1 and var X̄ = [var X1 + (n − 1) cov(X1 , X2 )]/n.
Solution: Observe that var X̄ = var(X1 + · · · + Xn )/n2 . But,

var(X1 + · · · + Xn ) = E[(X1 + · · · + Xn ) − E(X1 + · · · + Xn )]2 = E[Z1 + · · · + Zn ]2 ,

where Zj := Xj − EXj . Hence, since

n
X n
X n
X
[Z1 + · · · + Zn ]2 = Zi2 + Zi Zj ,
i=1 i=1 j=1,j6=i

we have that
n
X n
X n
X
2
E[Z1 + · · · + Zn ] = EZi2 + EZi Zj = nEZ12 + n(n − 1)EZ1 Z2 ,
i=1 i=1 j=1,j6=i

because Z1 , . . . , Zn are identically distributed. The desired result follows because EZ12 = var X1
and EZ1 Z2 = cov(X1 , X2 ) by the definition of Zj .

additional problem 4
d
(i) Let X = Bernoulli(p). Find EX, var X, and med(X) in the following cases.
(a) p = 1/3.
(b) p = 1/2.
(ii) Find the median outcome of an experiment with non-numeric outcomes c, a, b, c, a, c, b
under the usual lexicographic ordering a ≺ b ≺ c (read a ≺ b as “a precedes b”).
(iii) Find the median outcome of an experiment with non-numeric outcomes 4, ♦, , 4, ♦, 4, 
under the orderings 4 ≺ ♦ ≺  and 4 ≺  ≺ ♦.
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Solution: Define the random variables

 
1
 if outcome is 4 1
 if outcome is 4
Y := 2 if outcome is ♦ & Z := 2 if outcome is 
 
3 if outcome is  3 if outcome is ♦.
 

Then,  

 1 w.p. 3/7 1 w.p. 3/7

Y = 2 w.p. 2/7 & Z = 2 w.p. 2/7
 
3 w.p. 2/7 3 w.p. 2/7.
 
Since med(Y ) = 2, the median outcome under the ordering 4 ≺ ♦ ≺  is ♦. Similarly, since
med(Z) = 2, the median outcome under the ordering 4 ≺  ≺ ♦ is .
(iv) A class has 28 Freshmen, 25 Sophomores, 24 Juniors, and 23 Seniors. Identify the median
student.
additional problem 5
Let X be a random variable, QX (α) its α ∈ (0, 1) quantile, and g : R → R a function. Show
the following “equivariance” properties of quantiles.
(i) If g is increasing (not necessarily strictly increasing), then Qg(X) (α) = g(QX (α)).
(ii) Q−X (α) = −QX (1 − α).
(iii) If g is decreasing (not necessarily strictly decreasing), then Qg(X) (α) = g(QX (1 − α)).
Applications: These properties are very useful! E.g., med(aX + b) = a med(X) + b, where a, b are
constants, because x 7→ g(x) := ax + b is strictly increasing (decreasing) if a > 0 (a < 0). Similarly,
med(max(X, 0)) = max(med(X), 0) because x 7→ g(x) := max(x, 0) is increasing (but not strictly
increasing) on R. Conditional versions of these properties are used to identify quantile and censored
d d
quantile regression models, respectively. If Z = −Z, e.g., if Z = N(0, 1), then QZ = Q−Z . Hence, by
(ii), QZ (α) = −QZ (1 − α). This explains why, say, the 5th percentile of a N(0, 1) random variable is
equal to the negative of its 95th percentile.
Solution (i): Since g is increasing, (X ≤ QX (α)) ⊂ (g(X) ≤ g(QX (α))). Hence,
α ≤ Pr(X ≤ QX (α)) ≤ Pr(g(X) ≤ g(QX (α))).
Similarly, (X ≥ QX (α)) ⊂ (g(X) ≥ g(QX (α))) implies that
1 − α ≤ Pr(X ≥ QX (α)) ≤ Pr(g(X) ≥ g(QX (α))).
Hence, we have shown that
Pr(g(X) ≤ g(QX (α))) ≥ α & Pr(g(X) ≥ g(QX (α))) ≥ 1 − α.
But this means that g(QX (α)) is the α-quantile of g(X), i.e., Qg(X) (α) = g(QX (α)).
Solution (iii): Since g is decreasing, −g is increasing. Hence,
(i) (ii)
Q−g(X) (α) = −g(QX (α)) =⇒ −Qg(X) (1 − α) = −g(QX (α))
=⇒ Qg(X) (1 − α) = g(QX (α))
=⇒ Qg(X) (α) = g(QX (1 − α)). (α → 1 − α)