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Sampling Distribution Assignment Help
1. Probability Plots
Random samples of size n = 100 were simulated from four
distributions:
• Uniform(0, 1)
• Exponential(1)
• Normal(50, 10)
• Student’s t (4 degrees of freedom).
The quantile-quantile plots are plotted for each of these 4 samples:
Uniform QQ Plot Normal QQ Plot
Exponential QQ Plot t Dist. QQ Plot
For each sample, the values were re-scaled to have sample mean
zero and sample standard deviation 1
The Normal QQ plot for each set of standardized sample values is
given in the next display but they are in a random order. For each
distribution, identify the corresponding Normal QQ plot, and explain
your reasoning.
• Uniform(0, 1) = Plot
• Exponential(1) = Plot
• Normal(50, 10) = Plot
• Student’s t (4 degrees of freedom) = Plot
Solution:
The Student’s t sample has two extreme high values and one
extreme low value which are evident in Plot A, so
Plot A = t distribution
Plot B is the only plot that has a bow shape which indicates larger
observations are higher than would be expected for a normal
sample and smaller observations are less small than would be
expected for a normal sample. This is true for the Exponential
distribution which is asymmetric with a right-tail that is heavier
than a normal distribution.
Plot B = Exponential.
The Uniform(0, 1) sample has true mean 0.5 and true variance
equal to E[X2] − (E[X])2 = 1/3 − (1/2)2 = 1/12. For a typical sample,
the standardized sample values will be bounded (using the true
mean and standa d rd deviation to standardize, the values would no
larger than +(1 − .5)/ 1/12 = 1.73). For Plot C the range of the
standardized values is smallest, consistent with what would be
expected for a sample from a uniform distribution.
Plot C = Uniform distribution.
The QQ Plot for the normal distribution is unchanged and follows a
straight-line pattern indicating consistency of the ordered
observations with the theoretical quantiles – distribution
Plot D = Normal
2. Betas for Stocks
In S&P 500 Index. In financial modeling of stock returns, the Capital
Asset Pricing Model associates a “Beta” for any stock which
measures how risky that stock is compared to the “market
portfolio”. (Note: this name has nothing to do with the beta(a,b)
distribution!) Using monthly data, the Beta for each stock in the
S&P 500 Index was computed. The following display gives an index
plot, histogram, Normal QQ plot for these Beta values.
Index Plot of 500 Stock Betas (X)
Histogram
Normal Q−Q Plot
For the sample of 500 Beta values, x =1.0902 and sx =0.5053.
(a). On the basis of the histogram and the Normal QQ plot, are the
values consistent with being a random sample from a Normal
distribution?
Solution:
Yes, the values are consistent with being a random sample from a
Normal distribution. The normal QQ-plot is quite straight.
(b). Refine your answer to (a) focusing separately on the extreme
low values (smallest quantiles) and on the extreme large values
(highest quantiles).
Solution:
Consider the extremes of the distribution. The high positive points
appear a bit higher than would be expected for a normal sample
suggesting there are some outlier stocks with higher betas than
would be expected under a normal model. The lowest values near
zero appear a bit above the straight line through most of the
ordered points, suggesting that the stocks with lowest beta values
aren’t as low as might be expected under a normal model.
Bayesian Analysis of a Normal Distribution.
For a stock that is similar to those that are constituents of the S&P
500 index above, let X = 1.6 be an estimate of the Beta coefficient θ.
Suppose that the following assumptions are reasonable:
• The conditional distribution X given θ is Normal with known
variance:
• As a prior for θ, assume that θ is Normal with mean and variance
equal to those in the sample
(c). Determine the posterior distribution of θ given X = 1.6.
Solution:
This is the case of a normal conjugate prior distribution for the
normal sample observation. The posterior distribution of θ is given
by
where
and
Plugging in values we get
(d). Is the posterior mean between X and µprior? Would this
always be the case if a different value of X had been observed?
(e). Is the variance of the posterior distribution for θ given X
greater or less than the variance of the prior distribution for θ?
Does your answer depend on the value of X?
Solution:
(d). Yes, the posterior mean is a weighted average of X and µprior
which will always be between the two values.
(e). The variance of the posterior distribution τ 2 = (0.186)2 ∗ is
less than (.5053)2 = σ2 prior. From part (c), the posterior variance
does not vary with the outcome X = x
