Problems Book Final

Selected Text Problems with Answers
from Chapters 1−4 for
THE PRACTICE
OF BUSINESS
STATISTICS
DAVID S. MOORE
GEORGE P. MCCABE
Purdue University
WILLIAM DUCKWORTH
Iowa State University
STANLEY SCLOVE
University of Illinois at Chicago
W. H. Freeman and Company

New York
ISBN: 0-7167-9638-4
© 2002 by W. H. Freeman and Company
No part of this book may be reproduced by any mechanical, photographic, or electronic

process, or in the form of a phonographic recording, nor may it be stored in a retrieval
system, transmitted, or otherwise copied for public or private use, without written
permission from the publisher.
Printed in the United States of America
First printing 2001

Selected Text Problems with Answers
from Chapters 1−4 for
THE PRACTICE OF BUSINESS STATISTICS
Table of Contents
Chapter 1 Examining Distributions
Exercise 1.4 Occupational deaths. 1

Exercise 1.45 Education and income. 2
Exercise 1.53 A hot stock? 3
Exercise 1.54 Initial public offerings. 5
Exercise 1.69 GMAT scores. 6
Exercise 1.95 Grading managers. 7
Chapter 2 Examining Relationships
Exercise 2.10 Health and wealth. 8

Exercise 2.15 Business starts and failures. 10
Exercise 2.18 Where the stores are. 12
Exercise 2.25 Mutual fund performance. 14
Exercise 2.29 CEO compensation and stock market performance. 15
Exercise 2.45 Moving in step? 16
Exercise 2.46 Interpreting correlation. 17
Exercise 2.48 Cash or credit? 18
Exercise 2.55 What's my grade? 20
Exercise 2.75 Education and income. 21
Exercise 2.100 Are high interest rates bad for stocks? 22
Exercise 2.108 Size and selling price of houses. 24
Chapter 3 Producing Data

Exercise 3.11 Sampling by accountants. 26
Exercise 3.13 Ring-no-answer. 27
Exercise 3.19 Quality control sampling. 28
Exercise 3.40 Does charting help investors? 29
Chapter 4 Probability and Sampling Distributions
Exercise 4.24 Stock price movements. 30

Exercise 4.26 Car colors. 31
Exercise 4.39 How many cars? 32
Exercise 4.53 How many rooms. 33
Exercise 4.61 Time and motion studies. 34
Exercise 4.63 Time and motion studies. 35
Exercise 4.70 Diversification. 36
Exercise 4.87 Flaws in carpets. 37
Table B Random Digits Table 38
Answers 39
Moore/McCabe/Duckworth/Sclove: The Practice of Business Statistics 1
EXERCISE 1.4 Occupational deaths.

In 1999 there were 6023 job-related deaths in the United States. Among these were 807
deaths in agricultural-related jobs (including forestry and fishing), 121 in mining, 1190
in construction, 719 in manufacturing, 1006 in transportation and public utilities, 237 in
wholesale trade, 507 in retail trade, 105 in finance-related jobs (including insurance and
real estate), 732 in service-related jobs, and 562 in government jobs.
(a) Find the percent of occupational deaths for each of these job categories, rounded to the
nearest percent. What percent of job-related deaths were in categories not listed above?
(b) Make a well-labeled bar graph of the distribution of occupational deaths. Be sure to
include an “other occupations” bar.
(c) Make a well-labeled Pareto chart of these data. What percent of all occupational deaths
are accounted for by the first 3 categories in your Pareto chart?
(d) Would it also be correct to use a pie chart to display these data? Explain your answer.
2 Moore/McCabe/Duckworth/Sclove: The Practice of Business Statistics
EXERCISE 1.45 Education and income.

Each March, the Bureau of Labor Statistics (BLS) records the incomes of all adults in a
sample of 50,000 American households. We are interested in how income varies with the
highest education level a person has reached. Computer software applied to the data from
the March 2000 survey gives the following results for people aged 25 or over:
It is common to make boxplots of large data sets using the 5% and 95% points in place
of the minimum and maximum. The highest income among the 31,970 people with only
a high school education, for example, is $425,510. It is more informative to see that 95%
of this group earned less than $56,294. The 5% and 95% points contain between them the
middle 90% of the observations.
(a) Use this output to make boxplots that compare the income distributions for the five
education groups.
(b) Write a brief summary of the relationship between education and income. For example,
do people who start college but don’t get a degree do much better than people with only a
high school education?
EXERCISE 1.53 A hot stock?

We saw in Example 1.14 that it is usual in the study of investments to use the mean and
standard deviation to summarize and compare investment returns. On the following page,
Table 1.10 gives the monthly returns on Philip Morris stock for the period from August
1990 to August 2001. (The return on an investment consists of the change in its price plus
any cash payments made, given here as a percent of its price at the start of each month.)
(a) Make either a histogram or a stemplot of these data. How did you decide which graph
to make?
(b) There are two clear outliers. What are the values of these observations? (The most
extreme observation is explained by news of action against smoking, which depressed this
tobacco company stock.) Describe the shape, center, and spread of the data after you omit
the two outliers.
(c) Find the mean monthly return and the standard deviation of the returns. If you invested
$100 in this stock at the beginning of a month and got the mean return, how much would
you have at the end of the month?
(d) The distribution can be described as “symmetric and single-peaked, with two low out-
liers.” If you invested $100 in this stock at the beginning of the worst month in the data
(the most extreme outlier), how much would you have at the end of the month? Find the
mean and standard deviation again, this time leaving out the two low outliers. How much
did these two observations affect the summary measures? Would leaving out these two
observations substantially change the median? The quartiles? How do you know, without
actual calculation? (Returns over longer periods of time, or returns on portfolios containing
several investments, tend to follow a Normal distribution more closely than these monthly
returns. So use of the mean and standard deviation is better justified for such data.)
Table 1.10
Monthly percent returns on Phillip Morris stock
from August 1990 to August 2001
3.0 -5.7 1.2 4.1 3.2 7.3 7.5 18.7 3.7 -1.8
2.4 -6.5 6.7 9.4 -2.0 -2.8 -3.4 19.2 -4.8 0.5
-0.6 2.8 -0.5 -4.5 8.7 2.7 4.1 -10.3 4.8 -2.3
-3.1 -10.2 -3.7 -26.6 7.2 -2.4 -2.8 3.4 -4.6 17.2
4.2 0.5 8.3 -7.1 -8.4 7.7 -9.6 6.0 6.8 10.9
1.6 0.2 -2.4 -2.4 3.9 1.7 9.0 3.6 7.6 3.2
-3.7 4.2 13.2 0.9 4.2 4.0 2.8 6.7 -10.4 2.7
10.3 5.7 0.6 -14.2 1.3 2.9 11.8 10.6 5.2 13.8
-14.7 3.5 11.7 1.5 2.0 -3.2 -3.9 -4.7 9.8 4.9
-8.3 4.8 -3.2 -10.9 0.7 6.4 11.3 -5.1 12.3 10.5
9.4 -3.6 -12.4 -16.5 -8.9 -0.4 10.0 5.4 -7.3 0.5
-7.4 -22.9 -0.5 -10.6 -9.2 -3.3 5.2 5.4 19.4 3.5
-4.9 17.8 0.7 24.4 4.3 16.6 0.0 9.5 -0.4 5.6
2.6 -2.7 -8.1 4.2
EXERCISE 1.54 Initial public offerings.

During the stockmarket boom of the 1990s, initial public offerings (IPOs) of the stock of
new companies often produced enormous gains for people who bought the stocks when they
first became available. At least that’s what legend says. A study of all 4567 companies that
went public in the years 1990 to 2000 (excluding very small IPOs) found that on the average
their stock prices had either risen 111% or declined 31% by the end of the year 2000.One of
these numbers is the mean change in price and one is the median change. Which is which,
and how can you tell?
EXERCISE 1.69 GMAT scores.

Most graduate schools of business require applicants for admission to take the Graduate
Management Admission Council’s GMAT examination.Total scores on the GMAT for the
more than 500,000 people who took the exam between April 1997 and March 2000 are
roughly Normally distributed with mean µ = 527 and standard deviation σ = 112.
(a) What percent of test-takers have scores above 500?
(b) What GMAT scores fall in the lowest 25% of the distribution?
(c) How high a GMAT score is needed to be in the highest 5%?
EXERCISE 1.95 Grading managers.

Some companies “grade on a bell curve” to compare the performance of their managers
and professional workers. This forces the use of some low performance ratings, so that
not all workers are graded “above average.” Until the threat of lawsuits forced a change,
Ford Motor Company’s “performance management process” assigned 10% A grades, 80%
B grades, and 10% C grades to the company’s 18,000 managers. It isn’t clear that the
“bell curve” of ratings is really a Normal distribution. Nonetheless, suppose that Ford’s
performance scores are Normally distributed. This year, managers with scores less than 25
received C’s and those with scores above 475 received A’s. What are the mean and standard
deviation of the scores?
EXERCISE 2.10 Health and wealth.

On the following page, Figure 2.7 is a scatterplot of data from the World Bank. The
individuals are all the world’s nations for which data are available. The explanatory variable
is a measure of how rich a country is, the gross domestic product (GDP) per person. GDP
is the total value of the goods and services produced in a country, converted into dollars.
The response variable is life expectancy at birth.We expect people in richer countries to
live longer. Describe the form, direction and shape of the overall pattern. Does the graph
confirm our expectation? The three African nations marked on the graph are outliers;
a detailed study would ask what special factors explain the low life expectancy in these
countries.
Figure 2.7
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Life expectancy, years
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0 5000 10000 15000 20000 25000 30000

Gross domestic product per person
EXERCISE 2.15 Business starts and failures.

On the following page, Table 2.4 gives data for number of businesses started and number of
businesses failed by state for 1998. We might expect an association to exist between these
economic measures.
(a) Make a scatterplot of business starts against business failures. Take business starts as
the explanatory variable.
(b) The plot shows a positive association between the two variables. Why do we say that
the association is positive?
(c) Find the point for Florida in the scatterplot and circle it.
(d) There is an outlier at the upper right of the plot. Which state is this?
(e) We wonder about clusters and gaps in the data display. There is a relatively clear cluster
of states at the lower left of the plot. Four states are outside this cluster. Which states are
these? Are they mainly from one part of the country?
Table 2.4 Business Starts and Failures
State Starts Failures State Starts Failures

AL 2645 546 MT 397 201
AK 271 177 NE 565 383
AZ 2868 1225 NV 1465 677
AR 1091 748 NH 708 322
CA 21582 17679 NJ 6412 2024
CO 3041 2483 NM 887 585
CT 2069 530 NY 13403 4233
DE 508 28 NC 4371 846
DC 537 75 ND 229 144
FL 13029 2047 OH 4829 2524
GA 5471 800 OK 1367 990
HI 593 781 OR 1823 1109
ID 639 441 PA 5525 2641
IL 5542 3291 RI 544 150
IN 2611 473 SC 2023 410
IA 1020 244 SD 281 275
KS 967 1140 TN 2835 1369
KY 1824 270 TX 10936 6785
LA 1849 377 UT 1417 388
ME 577 259 VT 261 80
MD 3139 1283 VA 3502 860
MA 3425 1200 WA 2956 2528
MI 4293 1551 WV 623 305
MN 2111 1711 WI 2357 1005
MS 1347 177 WY 213 166
MO 2163 1321
EXERCISE 2.18 Where the stores are.

Target and Wal-Mart are two of the largest retail chains in the United States. Target has
977 stores and Wal-Mart has 2624 stores. The file ex02-18.dat has the number of Target
stores and Wal-Mart stores listed by state. (The contents of this file are displayed on the
following page.)
(a) Use software to create a scatterplot of the number of Target stores versus the number
of Wal-Mart stores for each of the fifty states.
(b) Identify any unusual observations in your scatterplot by labeling the point with the
state abbreviation. Describe specifically what about the observation makes it stand out in
the scatterplot.
(c) Comment on the form, direction, and strength of the relationship between the number
of Target stores and the number of Wal-Mart stores per state.
Contents of the file ex02-18.dat
State Targets Wal-Marts State Targets Wal-Marts

AL 4 82 MT 5 10
AK 0 5 NE 9 20
AZ 28 39 NV 12 16
AR 2 77 NH 3 22
CA 151 117 NJ 15 23
CO 24 41 NM 8 22
CT 3 20 NY 22 65
DE 1 5 NC 24 94
FL 68 143 ND 4 8
GA 30 96 OH 34 88
HI 0 5 OK 8 80
ID 4 13 OR 11 25
IL 52 111 PA 22 78
IN 29 83 RI 1 7
IA 18 51 SC 8 59
KS 10 50 SD 4 8
KY 12 74 TN 19 88
LA 2 80 TX 90 254
ME 0 20 UT 7 15
MD 22 30 VT 0 4
MA 8 37 VA 25 67
MI 48 57 WA 25 26
MN 56 39 WV 1 28
MS 2 61 WI 26 60
MO 18 112 WY 2 9
EXERCISE 2.25 Mutual fund performance.

Many mutual funds compare their performance with that of a benchmark, an index of the
returns on all securities of the kind that the fund buys. The Vanguard International Growth
Fund, for example, takes as its benchmark the Morgan Stanley EAFE (Europe, Australasia,
Far East) index of overseas stock market performance. Here are the percent returns for the
fund and for the EAFE from 1982 (the first full year of the fund’s existence) to 2000.
Year Fund EAFE Year Fund EAFE

1982 5.27 −0.86 1992 −5.79 −11.85
1983 43.08 24.61 1993 44.74 32.94
1984 −1.02 7.86 1994 0.76 8.06
1985 56.94 56.72 1995 14.89 11.55
1986 56.71 69.94 1996 14.65 6.36
1987 12.48 24.93 1997 4.12 2.06
1988 11.61 28.59 1998 16.93 20.33
1989 24.76 10.80 1999 26.34 27.30
1990 −12.05 −23.20 2000 −8.60 −13.96
1991 4.74 12.50
Make a scatterplot suitable for predicting fund returns from EAFE returns. Is there a clear
straight-line pattern? How strong is this pattern? (Give a numerical measure.) Are there
any extreme outliers from the straight-line pattern?
EXERCISE 2.29 CEO compensation and stock market performance.

An academic study says that, “The evidence indicates that the correlation between the
compensation of corporate CEOs and the performance of their company’s stock is close to
zero.” A business magazine reports this as “A new study shows that companies that pay
their CEOs highly tend to perform poorly in the stock market, and vice versa.” Explain
why the magazine’s report is wrong. Write a statement in plain language (don’t use the
word “correlation”) to explain the study’s conclusion.
EXERCISE 2.45 Moving in step?

One reason to invest abroad is that markets in different countries don’t move in step. When
American stocks go down, foreign stocks may go up. So an investor who holds both bears less
risk. That’s the theory. Now we read that “The correlation between changes in American
and European share prices has risen from 0.4 in the mid-1990s to 0.8 in 2000.”Explain to an
investor who knows no statistics why this fact reduces the protection provided by buying
European stocks.
EXERCISE 2.46 Interpreting correlation.

The same article mentioned in Exercise 2.45 that claims that the correlation between
changes in stock prices in Europe and the United States was 0.8 in 2000 goes on to say
that “Crudely, that means that movements on Wall Street can explain 80% of price move-
ments in Europe.” Is this true? What is the correct percent explained if r = 0.8?
EXERCISE 2.48 Cash or credit?

We might expect credit card purchases to differ from cash purchases at the same store.
Let’s compare regressions for credit card and cash purchases using the consignment shop
data in Table 2.1 (shown on the following page).
(a) Make a scatterplot of daily gross sales y versus items sold x for credit card purchases.
Using a separate plot symbol or color, add daily gross sales and items sold for cash. It is
somewhat difficult to compare the two patterns by eye.
(b) Regression can help. Find the equations of the two least-squares regression lines of
gross sales on items sold, for credit card sales and for cash sales. Draw these lines on your
plot. What are the slopes of the two regression lines? Explain carefully what comparing
the slopes says about credit card purchases versus cash purchases.
Table 2.1 Gross Sales and Number of Items Sold

EXERCISE 2.55 What’s my grade?

In Professor Friedman’s economics course, the correlation between the students’ total scores
before the final examination and their final examination scores is r = 0.6. The pre-exam
totals for all students in the course have mean 280 and standard deviation 30. The final
exam scores have mean 75 and standard deviation 8. Professor Friedman has lost Julie’s
final exam but knows that her total before the exam was 300. He decides to predict her
final exam score from her pre-exam total.
(a) What is the slope of the least-squares regression line of final exam scores on pre-exam
total scores in this course? What is the intercept?
(b) Use the regression line to predict Julie’s final exam score.
(c) Julie doesn’t think this method accurately predicts how well she did on the final exam.
Calculate r 2 and use the value you get to argue that her actual score could have been much
higher (or much lower) than the predicted value.

There is a strong positive correlation between years of schooling completed x and lifetime
earnings y for American men. One possible reason for this association is causation: more
education leads to higher-paying jobs. But lurking variables may explain some of the cor-
relation. Suggest some lurking variables that would explain why men with more education
earn more.
EXERCISE 2.100 Are high interest rates bad for stocks?

The scatterplot in Figure 2.25 (shown on the following page) suggests that returns on
common stocks may be somewhat lower in years with high interest rates. Here is part of
the Excel output for the regression of stock returns on the bill returns for the same years:
(a) What is the equation of the least-squares line? Use this line to predict the percent
return on stocks in a year when Treasury bills return 5%.
(b) Explain what the slope of the regression line tells us. Does the slope confirm that high
interest rates are in general bad for stocks?
(c) If you knew the return on Treasury bills for next year, do you think you could predict
the return on stocks quite accurately? Use both the scatterplot in Figure 2.25 and the
regression output to justify your answer.
Figure 2.25
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Treasury bill return (percent)
EXERCISE 2.108 Size and selling price of houses.

On the following page, Table 2.13 provides information on a random sample of 50 houses
sold in Ames, Iowa, in the year 2000.
(a) Describe the distribution of selling price with a graph and a numerical summary. What
are the main features of this distribution?
(b) Make a scatterplot of selling price versus square feet and describe the relationship
between these two variables.
(c) Calculate the least-squares regression line for these data. On average, how much does
each square foot add to the selling price of a house?
(d) What would you expect the selling price of a 1600 square foot house in Ames to be?
(e) What percentage of the variability in these fifty selling prices can be attributed to
differences in square footage?
Table 2.13 Houses sold in Ames, IA
Selling Price Square Footage ($) Age (as of 2000) Selling Price Square Footage ($) Age (as of 2000)
268380 1897 1 169900 1686 35
131000 1157 15 180000 2054 34
112000 1024 35 127000 1386 50
112000 935 35 242500 2603 10
122000 1236 39 152900 1582 3
127900 1248 32 171600 1790 1
157600 1620 33 195000 1908 6
135000 1124 33 83100 1378 72
145900 1248 35 125000 1668 55
126000 1139 39 60500 1248 100
142000 1329 40 85000 1229 59
107500 1040 45 117000 1308 60
110000 951 42 57000 892 90
187000 1628 1 110000 1981 72
94000 816 43 127250 1098 70
99500 1060 24 119000 1858 80
78000 800 68 172500 2010 60
55790 492 79 123000 1680 86
70000 792 80 161715 1670 1
53600 980 62 179797 1938 1
157000 1629 3 117250 1120 36
166730 1889 0 116500 914 4
340000 2759 6 117000 1008 23
195000 1811 3 177500 1920 32
215850 2400 27 132000 1146 37
EXERCISE 3.11 Sampling by accountants.

Accountants use stratified samples during audits to verify a company’s records of such
things as accounts receivable. The stratification is based on the dollar amount of the item
and often includes 100% sampling of the largest items. One company reports 5000 accounts
receivable. Of these, 100 are in amounts over $50,000; 500 are in amounts between $1000
and $50,000; and the remaining 4400 are in amounts under $1000. Using these groups as
strata, you decide to verify all of the largest accounts and to sample 5% of the midsize
accounts and 1% of the small accounts. How would you label the two strata from which
you will sample? Use Table B, starting at line 115, to select only the first 5 accounts from
each of these strata.
EXERCISE 3.13 Ring-no-answer.

A common form of nonresponse in telephone surveys is “ring-no-answer.” That is, a call is
made to an active number, but no one answers. The Italian National Statistical Institute
looked at nonresponse to a government survey of households in Italy during two periods,
January 1 to Easter and July 1 to August 31. All calls were made between 7 and 10 p.m.,
but 21.4% gave “ring-no-answer” in one period versus 41.5% “ring-no-answer” in the other
period.Which period do you think had the higher rate of no answers? Why? Explain why
a high rate of nonresponse makes sample results less reliable.
EXERCISE 3.19 Quality control sampling.

A manufacturer of chemicals chooses 3 containers from each lot of 25 containers of a reagent
to test for purity and potency. Below are the control numbers stamped on the bottles in
the current lot. Use Table B at line 111 to choose an SRS of 3 of these bottles.
A1096 A1097 A1098 A1101 A1108
A1112 A1113 A1117 A2109 A2211
A2220 B0986 B1011 B1096 B1101
B1102 B1103 B1110 B1119 B1137
B1189 B1223 B1277 B1286 B1299
EXERCISE 3.40 Does charting help investors?

Some investment advisors believe that charts of past trends in the prices of securities can
help predict future prices. Most economists disagree. In an experiment to examine the
effects of using charts, business students trade (hypothetically) a foreign currency at com-
puter screens. There are 20 student subjects available, named for convenience A, B, C,
. . . , T. Their goal is to make as much money as possible, and the best performances are
rewarded with small prizes. The student traders have the price history of the foreign cur-
rency in dollars in their computers. They may or may not also have software that highlights
trends. Describe two designs for this experiment, a completely randomized design and a
matched pairs design in which each student serves as his or her own control. In both cases,
carry out the randomization required by the design.
EXERCISE 4.24 Stock price movements.

You watch the price of Cisco Systems stock for four days. Give a sample space for each of
these random phenomena:
(a) You record the sequence of up days and down days.
(b) You record the number of up days.
EXERCISE 4.26 Car colors.

Choose a new car or light truck at random and note its color. Here are the probabilities of
the most popular colors for cars made in North America in 2000:
Color Silver White Black Dark Green Dark Blue Medium Red
Probability 0.176 0.172 0.113 0.089 0.088 0.067
What is the probability that the car you choose has any color other than the six listed?
What is the probability that a randomly chosen car is either silver or white?
EXERCISE 4.39 How many cars?

Choose an American household at random and let the random variable X be the number of
cars (including SUVs and light trucks) they own. Here is the probability model if we ignore
the few households that own more than 5 cars:
Number of cars X 0 1 2 3 4 5
Probability 0.09 0.36 0.35 0.13 0.05 0.02
(a) Verify that this is a legitimate discrete distribution. Display the distribution in a
probability histogram.
(b) Say in words what the event {X ≥ 1} is. Find P (X ≥ 1).
(c) Your company builds houses with two-car garages. What percent of households have
more cars than the garage can hold?
EXERCISE 4.53 How many rooms?

Furniture makers and others are interested in how many rooms housing units have, because
more rooms can generate more sales. Here are the distributions of the number of rooms for
owner-occupied units and renter-occupied units in San Jose, California:
Rooms 1 2 3 4 5 6 7 8 9 10
Owned .003 .002 .023 .104 .210 .224 .197 .149 .053 .035
Rented .008 .027 .287 .363 .164 .093 .039 .013 .003 .003
(a) Make probability histograms of these two distributions, using the same scales. What
are the most important differences between the distributions for owner-occupied and rented
housing units?
(b) Find the mean number of rooms for both types of housing unit. How do the means
reflect the differences you found in (a)?
EXERCISE 4.61 Time and motion studies.

A time and motion study measures the time required for an assembly line worker to perform
a repetitive task. The data show that the time required to bring a part from a bin to its
position on an automobile chassis varies from car to car with mean 11 seconds and standard
deviation 2 seconds. The time required to attach the part to the chassis varies with mean
20 seconds and standard deviation 4 seconds.
(a) What is the mean time required for the entire operation of positioning and attaching
the part?
(b) If the variation in the worker’s performance is reduced by better training, the standard
deviations will decrease. Will this decrease change the mean you found in (a) if the mean
times for the two steps remain as before?
(c) The study finds that the times required for the two steps are independent. A part that
takes a long time to position, for example, does not take more or less time to attach than
other parts. How would your answer in (a) change if the two variables were dependent with
correlation 0.8? With correlation 0.3?

Find the standard deviation of the time required for the two-step assembly operation studied
in Exercise 4.61, assuming that the study shows the two times to be independent. Redo
the calculation assuming that the two times are dependent, with correlation 0.3. Can you
explain in nontechnical language why positive correlation increases the variability of the
total time?
Portfolio analysis
Here are the means, standard deviations, and correlations for the monthly returns from
three Fidelity mutual funds for the 36 months ending in December 2000. Because there are
now three random variables, there are three correlations. We use subscripts to show which
pair of random variables a correlation refers to.
W = monthly return on Magellan Fund µW = 1.14% σW = 4.64%
X = monthly return on Real Estate Fund µX = 0.16% σX = 3.61%
Y = monthly return on Japan Fund µY = 1.59% σY = 6.75%
Correlations
ρW X = 0.19 ρW Y = 0.54 ρXY = −0.17
EXERCISE 4.70 Diversification.

Many advisors recommend using roughly 20% foreign stocks to diversify portfolios of U.S.
stocks. Michael owns Fidelity Magellan Fund, which concentrates on stocks of large Ameri-
can companies. He decides to move to a portfolio of 80% Magellan and 20% Fidelity Japan
Fund. Show that (based on historical data) this portfolio has both a higher mean return
and less volatility than Magellan alone. This illustrates the beneficial effects of diversifying
among investments.
EXERCISE 4.87 Flaws in carpets.

The number of flaws per square yard in a type of carpet material varies with mean 1.6 flaws
per square yard and standard deviation 1.2 flaws per square yard. The population distri-
bution cannot be Normal, because a count takes only whole-number values. An inspector
samples 200 square yards of the material, records the number of flaws found in each square
yard, and calculates x, the mean number of flaws per square yard inspected. Use the central
limit theorem to find the approximate probability that the mean number of flaws exceeds
2 per square yard.
Table B Random Digits

Line
101 19223 95034 05756 28713 96409 12531 42544 82853
102 73676 47150 99400 01927 27754 42648 82425 36290
103 45467 71709 77558 00095 32863 29485 82226 90056
104 52711 38889 93074 60227 40011 85848 48767 52573
105 95592 94007 69971 91481 60779 53791 17297 59335
106 68417 35013 15529 72765 85089 57067 50211 47487
107 82739 57890 20807 47511 81676 55300 94383 14893
108 60940 72024 17868 24943 61790 90656 87964 18883
109 36009 19365 15412 39638 85453 46816 83485 41979
110 38448 48789 18338 24697 39364 42006 76688 08708
111 81486 69487 60513 09297 00412 71238 27649 39950
112 59636 88804 04634 71197 19352 73089 84898 45785
113 62568 70206 40325 03699 71080 22553 11486 11776
114 45149 32992 75730 66280 03819 56202 02938 70915
115 61041 77684 94322 24709 73698 14526 31893 32592
116 14459 26056 31424 80371 65103 62253 50490 61181
117 38167 98532 62183 70632 23417 26185 41448 75532
118 73190 32533 04470 29669 84407 90785 65956 86382
119 95857 07118 87664 92099 58806 66979 98624 84826
120 35476 55972 39421 65850 04266 35435 43742 11937
121 71487 09984 29077 14863 61683 47052 62224 51025
122 13873 81598 95052 90908 73592 75186 87136 95761
123 54580 81507 27102 56027 55892 33063 41842 81868
124 71035 09001 43367 49497 72719 96758 27611 91596
125 96746 12149 37823 71868 18442 35119 62103 39244
126 96927 19931 36809 74192 77567 88741 48409 41903
127 43909 99477 25330 64359 40085 16925 85117 36071
128 15689 14227 06565 14374 13352 49367 81982 87209
129 36759 58984 68288 22913 18638 54303 00795 08727
130 69051 64817 87174 09517 84534 06489 87201 97245
131 05007 16632 81194 14873 04197 85576 45195 96565
132 68732 55259 84292 08796 43165 93739 31685 97150
133 45740 41807 65561 33302 07051 93623 18132 09547
134 27816 78416 18329 21337 35213 37741 04312 68508
135 66925 55658 39100 78458 11206 19876 87151 31260
136 08421 44753 77377 28744 75592 08563 79140 92454
137 53645 66812 61421 47836 12609 15373 98481 14592
138 66831 68908 40772 21558 47781 33586 79177 06928
139 55588 99404 70708 41098 43563 56934 48394 51719
140 12975 13258 13048 45144 72321 81940 00360 02428
141 96767 35964 23822 96012 94591 65194 50842 53372
142 72829 50232 97892 63408 77919 44575 24870 04178
143 88565 42628 17797 49376 61762 16953 88604 12724
144 62964 88145 83083 69453 46109 59505 69680 00900
145 19687 12633 57857 95806 09931 02150 43163 58636
146 37609 59057 66967 83401 60705 02384 90597 93600
147 54973 86278 88737 74351 47500 84552 19909 67181
148 00694 05977 19664 65441 20903 62371 22725 53340
149 71546 05233 53946 68743 72460 27601 45403 88692
150 07511 88915 41267 16853 84569 79367 32337 03316
Answers to Problems
selected from
Chapters 1−4 for
THE PRACTICE OF BUSINESS STATISTICS
EXERCISE 1.4 Occupational deaths.

(a) 13% agricultural; 2% mining; 20% construction; 12% manufacturing; 17% transportation and
utilities; 4% wholesale trade; 8% retail trade; 2% finance, 12% service; 9% government; 1%
other.
(b) See plot below.
Distribution of occupational deaths
20
15
Percent
10
5
0
Ag. Mines Const. Manuf. Trans. Whole- Retail Finance Svc. Govt. Other
& sale
Utils.
(c) See plot below. 50%.

Pareto chart of occupational deaths
20
15
Percent
10
5
0
Const. Trans. Ag. Svc. Manuf. Govt. Retail Whole- Mines Finance Other
& sale
Utils.
(d) Yes it would because each death can be assigned to exactly one category.

(a) See plot below.
150000
Income
50000
0
High school Some college Bachelor's Master's Professional
(b) Median income in March of 2000 appeared to increase with education level, although there
was more income variability (as evidenced by the IQR) in each progressively higher education
group. On average those with a higher level of education earn more, but there are plenty of
exceptions to this pattern. For example, the top 25% of earners with only a high school diploma
earn more than the bottom 25% with a Master's degree.
EXERCISE 1.53 A hot stock?

(a) The sample size is large enough that a stemplot is probably more difficult to read than a
histogram. Further, plotting these data in a stemplot requires the values to be rounded, which
eliminates one common advantage of this plot. See plot below.
Monthly percent return on Phillip Morris stock (8/90-8/01)
40
30
Number of months
20
10
0
-30 -20 -10 0 10 20
Percent return
(b) The outliers are -26.6 and -22.9. After the outliers have been omitted, the distribution of
monthly returns is unimodal and approximately symmetric with only some left skew. The center
of the returns appears to be just above zero. The returns range from about -20 to about 25, with
well over half of the returns between -10 and 15.
(c) The mean is 1.63, the standard deviation is 8.29. An investment of $100 would be worth
$101.63.
(d) $73.4. Without the outliers, the mean is 2.04 and the standard deviation is 7.65. The mean
increases by about .41 percentage points, while the standard deviation drops by 0.63 percentage
points. Since the median and quartiles are robust or resistant to outliers, they would not change
very much if the outliers were omitted.
EXERCISE 1.54 Initial public offerings

The median is -31% and the mean is +111%. Some very successful companies will inflate the
mean, but the median is more resistant to extreme values. It was not true that half of all
companies increased their stock price more than 111% and half by less.
EXERCISE 1.69 GMAT Scores

(a) 59.53%
(b) 451 and below.
(c) Above 711.
EXERCISE 1.95 Grading managers

Mean is 250; standard deviation is 175.57.
EXERCISE 2.10 Health and wealth

There appears to be a positive relationship between GDP per person and life expectancy at birth.
The relationship is not linear but rather curved and, judging by the scatter about the c-shape,
moderately strong. The graph supports our expectation of a positive relationship.
EXERCISE 2.15 Business starts and failures

(a) See plot below.
Business failures by business starts in 1998 (50 states and DC)
CA
15000
Business failures
10000
TX
5000
NY
FL
0
0 5000 10000 15000 20000
Business starts
(b) Because, on average, as the explanatory variable increases, so does the response or dependent
variable. Further, the straight line that might be used to describe these data has a positive slope.
(c) See labeled point on plot above.
(d) California.
(e) The states are California, Florida, New York, and Texas. They are not from one region, but
are the four most populous states.
EXERCISE 2.18 Where the stores are.

(a) See plot below.
150 Target stores vs. Wal-Mart stores in 50 states
CA
100
Target stores
TX
50
0
0 50 100 150 200 250
Wal-Mart stores
(b) Two points stand out: California and Texas. California has a very high number of Target
stores, and a relatively high number of Wal-Marts. Texas has an extremely high number of Wal-
Mart stores and more Targets than every state but California.
(c) The relationship between Wal-Mart stores and Target stores is positive and approximately
linear. The strength of the relationship is moderate to weak since the points are not tightly
clustered about a line.
EXERCISE 2.25 Mutual fund performance

See plot below. A straight line appears to describe the data adequately; the correlation is
estimated to be 0.85. There are no extreme outliers, although 1983 and 1986 are relatively far
from the line. 50
40
Vanguard return (percent)
30
20
10
0
0 20 40 60
EAFE return (percent)
EXERCISE 2.29 CEO compensation and stock market performance.

The magazine is incorrectly interpreting a correlation of zero to mean there is a negative
relationship between compensation and performance. We might explain the study's conclusions
by saying that knowing a company's stock performance provides almost no information about
what the CEO will earn, and knowing a CEO's compensation provides little to no information
about the company's stock performance.
EXERCISE 2.45 Moving in step?

The correlation between American and European stock prices is positive and has become fairly
strong. Therefore stocks in the US and Europe are now to some degree marching in lockstep. A
shift in the prices of shares in the American market is likely to be met with a shift in the same
direction and of a similar magnitude in the European market. Therefore the European market
doesn't counterbalance moves in the American market.
EXERCISE 2.46 Interpreting correlation.

No this is not true. About 64% of the variability in one market is explained by changes in the
other market.
EXERCISE 2.48 Cash or credit?

(a) See plot below.
Gross sales vs. items sold for credit and cash
= credit
800
= cash
600
Gross sales ($)
400
200
0 10 20 30 40 50
Items sold
(b) Gross sales = 240.88 + 10.34(Item count credit card); Gross sales = 64.58 + 12.46(Item count
cash); One additional cash purchase is expected to increase the daily gross sales by an estimated
$12.46, while an additional credit card purchase is expected to increase the gross sales by an
estimated $10.34.
EXERCISE 2.55 What's my grade?

(a) The slope is 0.16. The intercept is 30.2.
(b) 78.2
(c) r2 = 0.36. Only 36% of the variation in final exam scores is explained by the students' pre-
exam totals. Other factors (such as time spent preparing for the exam) also influenced final exam
scores. Students could have done much worse or much better than predicted based on these other
factors.

Lurking variables might include health and socioeconomic background. Men from families with
more resources tend to be better educated, and men who are in better health will live longer and
earn more.
EXERCISE 2.100 Are high interest rates bad for stocks?

(a) Stock return = 16.2352 - 0.5727(Tbill return). 13.37%.
(b) A negative slope suggests that as treasury bill returns increase, average stock returns would
decrease. No because we cannot conclude the true slope is different from zero and therefore we
cannot conclude there is a linear relationship between T-bills and stock returns.
(c) Neither the scatterplot nor the regression output provide evidence that there is a linear
relationship between these two variables. Knowing the T-bill return for next year would probably
not help us predict stock returns.
EXERCISE 2.108 Size and selling price of houses.

(a) The distribution is unimodal with a median of $127,100 but it is heavily skewed right. The
selling prices ranged from $53,600 to $340,000. About one quarter of all homes sold for less than
$110,500 and about one quarter for more than $169,100. See plot below.
Selling price of Ames, IA homes
20
15
10
5
0
50000 100000 150000 200000 250000 300000 350000
Selling price ($)

(b) There appears to be a moderate to strong positive linear relationship between the square
footage of an Ames-area home and its selling price. See plot below.
350000
250000 Selling price vs. square feet of Ames, IA homes
Price ($)
150000
50000
500 1000 1500 2000 2500
Square feet
(c) The estimated intercept is 4786.46 and the estimated slope is 92.82. On average, an additional
square foot will add an estimated $92.82 to the selling price of a home.
(d) $153,300.10.
(e) 69.64%.
EXERCISE 3.11 Sampling by accountants.

From the medium-debt accounts strata, sample accounts 417, 494, 322, 247, and 097. From the
small-debt accounts strata, sample accounts 3698, 1452, 2605, 2480, and 3716.
EXERCISE 3.13 Ring-no-answer.

Most likely the higher "ring-no-answer" rate is from the July 1 to August 31 period, since
households are more likely to be away on vacation during the summer months. A high rate of
nonresponse increases the chances that certain groups are systematically underrepresented in the
sample; the sample does not represent the population of interest so much as it represents those
people who tend to be at home and are willing to answer the survey questions.
EXERCISE 3.19 Quality control sampling.

Bottles 12, 4, and 11. (B0986, A1101, A2220.)
EXERCISE 3.40 Does charting help investors?

Ten of the 20 subjects are selected at random and given computers with the software that
highlights trends. The other ten subjects are given computers without the software. After a fixed
period of trading, compare average profits for the two groups. One possible randomization is to
assign students A, B, C, D, F, G, I, M, R, and S to the computers with the trend software and
students E, H, J, K, L, N, O, P, Q, and T to the computers without the trend software.
For the matched pairs design, ten subject are initially assigned computers with the trend
highlighting software while the other ten are given standard computers. After a fixed trading
period, students switch computer types and trade for the same amount of time. One possible
randomization is to initially assign students C, D, F, H, I, J, L, M, N, and S to the computers with
the trend software and students A, B, E, G, K, O, P, Q, R, and T to the computers without it.
EXERCISE 4.24 Stock price movements.

(a) {++++, +++-, ++-+, +-++, -+++, ++--, +--+, --++, -+-+, +-+-, -
++-, +---, -+--, --+-, ---+, ----}
(b) {0, 1, 2, 3, 4}
EXERCISE 4.26 Car colors.

0.295; 0.348.
EXERCISE 4.39 How many cars?

(a) The probabilities are all between zero and one and sum to 1. See plot below.
0.4
0.3 Probability histogram for number of cars owned
Probability
0.2
0.1
0.0
0 1 2 3 4 5
Cars
(b) A randomly chosen household has one or more cars. The probability of this event is 0.91.
(c) 0.20.
EXERCISE 4.53 How many rooms?

(a) The owner-occupied distribution is mounded with a center near 6 while the renter-occupied
distribution is more peaked with a centered near 4. See plots below and on following page.
0.4
0.3
Probability
0.2
0.1
0.0
1 2 3 4 5 6 7 8 9 10
Rooms
Probability histogram of rooms in rented units
0.4
0.3
Probability
0.2
0.1
0.0
1 2 3 4 5 6 7 8 9 10
Rooms
(b) The mean for owner-occupied units is 6.284, the mean for renter-occupied units is 4.187. The
difference in means is evident in the plots.

(a) Mean time is 31 seconds.
(b) No because a reduction in variation about the mean is not the same as a reduction in average
time.
(c) The overall mean does not depend on either standard deviation or the correlation and would
not change.

4.47; 4.73; Longer times in the first step are associated with longer times in the second step, and
shorter times in the first step are associated with shorter times in the second step. Therefore, if the
first step takes longer than average, the second one is likely to as well, and the two steps could
end up taking much longer than average. The positive correlation causes more spread about the
mean. If the correlation were negative, the delays or advances would tend to cancel each other
out and there would be less spread about the mean.
EXERCISE 4.70 Diversification.

The mean return of the diversified portfolio is 1.23%. The standard deviation is 4.58%.
EXERCISE 4.87 Flaws in carpets

<0.0001

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Selected Text Problems with Answers

from Chapters 1−4 for

W. H. Freeman and Company

© 2002 by W. H. Freeman and Company

No part of this book may be reproduced by any mechanical, photographic, or electronic

Printed in the United States of America

First printing 2001

Chapter 1 Examining Distributions

Exercise 1.4 Occupational deaths. 1

Chapter 2 Examining Relationships

Exercise 2.10 Health and wealth. 8

Chapter 3 Producing Data

Chapter 4 Probability and Sampling Distributions

Exercise 4.24 Stock price movements. 30

Table B Random Digits Table 38

EXERCISE 1.4 Occupational deaths.

EXERCISE 1.45 Education and income.

EXERCISE 1.53 A hot stock?

EXERCISE 1.54 Initial public offerings.

EXERCISE 1.69 GMAT scores.

EXERCISE 1.95 Grading managers.

EXERCISE 2.10 Health and wealth.

0 5000 10000 15000 20000 25000 30000

EXERCISE 2.15 Business starts and failures.

Table 2.4 Business Starts and Failures

State Starts Failures State Starts Failures

EXERCISE 2.18 Where the stores are.

Contents of the file ex02-18.dat

State Targets Wal-Marts State Targets Wal-Marts

EXERCISE 2.25 Mutual fund performance.

Year Fund EAFE Year Fund EAFE

EXERCISE 2.29 CEO compensation and stock market performance.

EXERCISE 2.45 Moving in step?

EXERCISE 2.46 Interpreting correlation.

EXERCISE 2.48 Cash or credit?

Table 2.1 Gross Sales and Number of Items Sold

EXERCISE 2.55 What’s my grade?

EXERCISE 2.75 Education and income.

EXERCISE 2.100 Are high interest rates bad for stocks?

EXERCISE 2.108 Size and selling price of houses.

Table 2.13 Houses sold in Ames, IA

EXERCISE 3.11 Sampling by accountants.

EXERCISE 3.13 Ring-no-answer.

EXERCISE 3.19 Quality control sampling.

EXERCISE 3.40 Does charting help investors?

EXERCISE 4.24 Stock price movements.

EXERCISE 4.26 Car colors.

EXERCISE 4.39 How many cars?

EXERCISE 4.53 How many rooms?

EXERCISE 4.61 Time and motion studies.

EXERCISE 4.63 Time and motion studies.

EXERCISE 4.70 Diversification.

EXERCISE 4.87 Flaws in carpets.

Table B Random Digits

EXERCISE 1.4 Occupational deaths.

(c) See plot below. 50%.

EXERCISE 1.45 Education and income.

High school Some college Bachelor's Master's Professional

EXERCISE 1.53 A hot stock?

-30 -20 -10 0 10 20

EXERCISE 1.54 Initial public offerings

EXERCISE 1.69 GMAT Scores