Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
Deep dive into the quiz with AI chat providers.
We prepare a focused prompt with your quiz and certificate details so each AI can offer a more tailored, in-depth explanation.
An empirical study of ABC stock listed on the New York Exchange reveals that the stock has closed higher on one-third of all days in the past few months. Given that up and down days are independent, determine the probability of ABC stock closing higher for six consecutive days.
Other
Community
NNikitesh
A
0.17
B
0.0137
C
0.03704
D
0.00137
Explanation:
Explanation
From the problem statement:
- Probability of closing higher = 1/3
- Days are independent events
- We need probability of 6 consecutive higher closes
Calculation:
Step-by-step reasoning:
- Since days are independent, the probability of multiple consecutive events is the product of their individual probabilities
- Each day has probability 1/3 of closing higher
- For 6 consecutive days: (1/3) × (1/3) × (1/3) × (1/3) × (1/3) × (1/3) = (1/3)^6
- (1/3)^6 = 1/729 ≈ 0.001371742
Verification with options:
- Option D: 0.00137 matches the calculated value
- Option B: 0.0137 is 10 times larger (might be (1/3)^4)
- Option C: 0.03704 is approximately (1/3)^3
- Option A: 0.17 is much larger and not mathematically related
Key concept: This question tests understanding of independent events in probability theory, which is fundamental to quantitative analysis in finance.
Comments
Loading comments...