This week, we continue our study of parametric probability models by talking about the bivariate normal distribution, and about the stock market.

Topics for Monday:

  • the bivariate normal distribution.
  • regression to the mean.
  • Monte Carlo simulation of stock/bond portfolios.

Topics for Wednesday:

Reading

Please read the rest of Chapter 15 on the normal distribution. You can safely skip the section entitled “Functions of random variables (advanced topic)” starting on page 316. You are not responsible for this section in this course.

I have also posted a short (2.5 page) set of summary notes on bootstrap resampling, the small lecture topic on Wednesday.

For Monday of next week, please read through page 327 of Chapter 16. You can safely stop once you reach the section entitled “Advanced topic: estimating the parameters of the logistic regression model.” You are not responsible for anything beyond this section.

Software

For Monday, please download the R script bivariate_normal.R from the R Scripts tab above. For the bivariate normal script to work, you will need to first install the mvtnorm library in R.

For Wednesday, please download the script portfolio.R.

I have posted a software walkthrough that outlines an approach for solving last week’s homework problem on Monte Carlo simulation. A few of the details are different, but you’ll see how these can be easily adapted to the homework problem.

Finally, if you want to get ahead for next week, you can look to the R walkthrough on logistic regression. I will ask you to complete this by the time you come to class next Wednesday (last class day of the semester).

Exercises

This week marks the last set of exercises for the semester. Exercises 9 are on simulating portfolios and logistic regression models. They are due by 5 PM on the last day of the semester: Friday, May 5, 2017. You may submit them either as a hard copy under my office door (CBA 6.478) or as an electronic PDF copy to statdropbox@gmail.com (same e-mail as for projects).