A believer in the \"random walk\" theory of the behavior of stock prices thinks

Question

A believer in the "random walk" theory of the behavior of stock prices thinks that an index of stock prices has probability 0.65 of increasing in any year. Moreover, the change in the index in any given year is not influenced by whether it rose or fell in earlier years. Let X be the number of years among the next 6 years in which the index rises. Give the possible values that X can take and the probability of each value. X = 0 X = 3 X = 4 X = 6 X = 1 X = 5 X = 2 1. p = 0.002 2. p = 0.020 3. p = 0.095 4. p = 0.235 5. p = 0.328 6. p = 0.244 7. p = 0.075

Explanation / Answer

This is binomial distribution problem with n =6 and p = 0.65

P(X=r) = nCr * p^r * (1-p)^(n-r)

using the above formula for different values of r we have the below table

P(X=0) 0.001838 P(X=1) 0.020484 P(X=2) 0.095102 P(X=3) 0.235491 P(X=4) 0.328005 P(X=5) 0.243661 P(X=6) 0.075419

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.