In finance, one example of a derivative is a financial asset whose value is determined (derived) from a bundle of various assets, such as mortgages. Suppose a randomly selected mortgage in a certain bundle has a probability of 0.17 of default. Complete parts a to d below. (a) What is the probability that a randomly selected mortgage will not default (that is, pay off)? The probability is . (Type an integer or a decimal. Do not round.) (b) What is the probability that a bundle of seven randomly selected mortgages will not default assuming the likelihood any one mortgage being paid off is independent of the others? Note: A derivative might be an investment that only pays when all seven mortgages do not default. The probability is. (Round to four decimal places as needed.) (c) What is the probability that the derivative from part (b) becomes worthless? That is, at least one of the mortgages defaults. The probability is - (Round to four decimal places as needed.) (d) In part (b), we made the assumption that the likelihood of default is independent. Is this a reasonable assumption? Explain. V national economic conditions (such as recession) impact all mortgages. So, if one mortgage defaults, the likelihood of a second mortgage defaulting

In finance, one example of a derivative is a financial asset whose value is determined (derived) from a bundle of various assets, such as mortgages. Suppose a randomly selected mortgage in a certain bundle has a probability of 0.17 of default. Complete parts a to d below. (a) What is the probability that a randomly selected mortgage will not default (that is, pay off)? The probability is . (Type an integer or a decimal. Do not round.) (b) What is the probability that a bundle of seven randomly selected mortgages will not default assuming the likelihood any one mortgage being paid off is independent of the others? Note: A derivative might be an investment that only pays when all seven mortgages do not default. The probability is. (Round to four decimal places as needed.) (c) What is the probability that the derivative from part (b) becomes worthless? That is, at least one of the mortgages defaults. The probability is - (Round to four decimal places as needed.) (d) In part (b), we made the assumption that the likelihood of default is independent. Is this a reasonable assumption? Explain. V national economic conditions (such as recession) impact all mortgages. So, if one mortgage defaults, the likelihood of a second mortgage defaulting

Glencoe Algebra 1, Student Edition, 9780079039897, 0079039898, 2018

18th Edition

ISBN:9780079039897

Author:Carter

Publisher:Carter

Chapter10: Statistics

Section10.1: Measures Of Center

Problem 9PPS

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