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Consider a market with N assets. The returns from those assets are determined by the outcome of the tosses from N independent coins. Let m
Consider a market with N assets. The returns from those assets are determined by the outcome of the tosses from N independent coins. Let m denote the return of the asset i in period t, for i =1,...,N and t = 1,...,T. At each period if, all N coins are tossed, and n; = 1 if coin i yields a head; and 4r\" = 1 if ooin 1' yields a tail. A researcher Abby is interested in 1which assets, if any, can generate a positive expected return. To examine this question, she plans to conduct the following hypothesis test for each asset Ha :EU'J = 0 H,1 :E(r,;] l) 0, using a time series of returns for asset i, namer {r,,};,, with T = 200. 24. (4 points} Suppose that all coins are fair. In other words, Pr(r,;, = 1) = Pr(r,, = 1) = 0.5 for anyr i and t. What is the probability that the average return from asset 1 is signicantly positive at 5% level? 25. (4 points) Suppose that all coins are fair. In other words, Fir-[m = l] = Pr[r,, = 1] = 0.5 for any i and t. Suppose that N = 100. How many assets, out of the 100, should Abby expect to produce a signicant positive test statistic at the 10% level
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