Download exam 1 version A

Math 217
Exam #1
Chapters 1-2 plus 9.1



Name: __________________
Show your work for possible partial credit.
Don’t waste time on unnecessary calculations.
This is a 50 minute exam. Budget your time wisely
1. (10 pts) A mutual-fund company’s newsletter says, “A well-diversified portfolio includes
assets with low correlations.” The newsletter includes a table of correlations between the
annual returns on various classes of investments. For example, the correlation between
municipal bonds and large-cap stocks is 0.50 and the correlation between municipal bonds
and small-cap stocks is 0.21.
(a) Rachel invests heavily in municipal bonds. She wants to diversify by adding an
investment whose returns do not closely follow the returns on her bonds. Should she choose
large-cap stocks or small-cap stocks for this purpose? _____________
(b) If Rachel wants an investment that tends to increase when the return on her bonds drops,
what kind of correlation should she look for? _________________
2. (10 pts) After fitting a regression line to her data, Kathy plots the residuals (actual y
minus predicted y) against the x data to decide whether the regression line gives a good
fit. Kathy’s residual plot is shown below, with a horizontal line plotted at level 0. What
should Kathy conclude about her regression line -- is it a good model for the original
data? __________ Explain clearly: