
Answer-first summary for fast verification
Answer: Mean = 0.45, variance = 0.38
## Explanation This is a binomial distribution problem where: - Number of trials (n) = 3 bonds - Probability of success (default) for each trial (p) = 0.15 - The events are independent **Mean Calculation:** For a binomial distribution, the mean (expected value) is: \[\mu = n \times p = 3 \times 0.15 = 0.45\] **Variance Calculation:** For a binomial distribution, the variance is: \[\sigma^2 = n \times p \times (1-p) = 3 \times 0.15 \times (1-0.15) = 3 \times 0.15 \times 0.85 = 0.3825\] Rounding to two decimal places, variance = 0.38 **Verification:** - Option A: Mean = 0.15 (incorrect), Variance = 0.32 (incorrect) - Option B: Mean = 0.45 (correct), Variance = 0.38 (correct) ✓ - Option C: Mean = 0.45 (correct), Variance = 0.32 (incorrect) - Option D: Mean = 0.15 (incorrect), Variance = 0.38 (incorrect) Therefore, the correct answer is **B** with mean = 0.45 and variance = 0.38.
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A portfolio manager holds three bonds in one of his portfolios and each has a 1-year default probability of 15%. The event of default for each of the bonds is independent. What is the mean and variance of the number of bonds defaulting over the next year?
A
Mean = 0.15, variance = 0.32
B
Mean = 0.45, variance = 0.38
C
Mean = 0.45, variance = 0.32
D
Mean = 0.15, variance = 0.38
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