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Solution
1. The sampling error:
b = (X 0 X) 1 X 0 y
= (X 0 X) 1 X 0 (X + ")
= (X 0 X) 1 X 0 X + (X 0 X) 1
X 0"
| {z }
=In
= (X 0 X) 1
X 0"
E(b j X) = E(A" j X)
A is X m easurable
= AE(" j X) = 0 by Assumption E(" j X) = 0
3.
1
Problem 2 Let ( ; F; P) be a probability space. There exists two random vari-
ables X and Y . If we can observe X,what we can Rsay about Y ? One way is to
2
use mean square error, M SE = E(Y g(X))2 = fY (!) g(X(!))g dP (!).
Show that g (X) = E(Y j X) is the best solution.
Solution
M SE = E[Y g(X)]2
= E[Y E(Y j X) + E(Y j X) g(X)]2
= E[Y E(Y j X)]2 + E[E(Y j X) g(X)]2
+2Ef[Y E(Y j X)][E(Y j X) g(X)]g
| {z }
(3)
2
Problem 3 Variable X is normally distributed with mean and variance .
1. Assume 2 = 80: The observed value of the sample mean X of a random
sample of size 20 is 81:2. Find a 95% con…dence interval for .
2
2. Assume = 9:Find n such that P r(X 1< < X + 1) = 0:9 approxi-
mately.
Solution
2
2
if X s N ( ; ) then X s N ( ; n )
p
1. CI95% ( ) = (X F 1
(0:975) pn ; X + F 1
(0:975) pn ) = (81:2 1:96 p80
20
;
p
81:2 + 1:96 p80
20
) = (77:28; 85:12)
1
2. Pr(X 1 < < X + 1) = 0:9 =) CI90% ( ) = (X F (0:95) pn ;
1
X + F (0:95) pn ) = (X 1; X + 1) =)
p
F 1 (0:95) pn = 1 =) n = F 1 (0:95) = 1:645 3 = 4:935 =) n t 24
2
Problem 4 Show for any two random variables X and Y ,
V arX = E(V ar(X j Y )) + V ar(E(X j Y )):
2
(1) = E[E (X E(X j Y )) j Y ]....by law of iterated expectation
2
= EfE[X 2 + (E(X j Y )) 2XE(X j Y ) j Y ]g
2
= E[E(X j Y ) + (E(X j Y ))2
2
2 (E(X j Y )) ]...by linearity & take out known
2
= E[E(X 2 j Y ) (E(X j Y )) ] = E[V ar(X j Y )]
(2) = E[E 2 (X j Y ) + E 2 (X) 2E(X)E(X j Y )]
= E(E 2 (X j Y )) + EE 2 (X) 2E(X)E(E(X j Y ))
| {z } | {z }
=E 2 X =EX
2 2
= E(E (X j Y )) (E(E(X j Y ))) = V ar(E(X j Y )):
3
Problem 5 Suppose the distribution of Y conditional on X = x is N (x; x2 )
and the marginal distribution of X is uniform (0; 1):Find EY; V arY; and Cov(X; Y ):
Solution
1
Notes the pdf for X is fX (x) = 1 0 = 1;because X is uniform in (0; 1):
2 1
= EX
4
Z1
1 1 1 1
= x2 fX (x)dx = = :
4 3 4 12
0