Financial Risk Manager Part 1

Explanation

This is a binomial probability problem where:

• n = 5 (number of trials/days)
• x = 2 (number of successes/underpriced stocks)
• p = 0.52 (probability of success)
• q = 1 - p = 0.48 (probability of failure)

The binomial probability formula is:

$P(X = x) = \binom{n}{x} p^x (1-p)^{n-x}$

Substituting the values:

$P(X = 2) = \binom{5}{2} \cdot 0.52^2 \cdot 0.48^3$

Step-by-step calculation:

1. Combination term: $\binom{5}{2} = \frac{5!}{2! \cdot 3!} = \frac{120}{12} = 10$

2. Probability terms: $0.52^2 = 0.2704$ $0.48^3 = 0.110592$

3. Final calculation: $P(X = 2) = 10 \times 0.2704 \times 0.110592 = 0.2990$

Therefore, the probability of selecting exactly two underpriced stocks during the week is 0.299, which corresponds to option D.