Financial Risk Manager Part 1
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A trader purchases one single stock every day during five working days. His risk manager believes that the probability of selecting an underpriced stock at any given time is 52%. Assuming a binomial distribution, what is the probability of selecting exactly two underpriced stocks during the week out of the universe of underpriced and overpriced stocks?
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Community
NNikitesh
A
0.395
B
0.208
C
0.327
D
0.299
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:
Calculating step by step:
- Binomial coefficient: \binom{5}{2} = \frac{5!}{2!3!} = \frac{120}{2 \times 6} = \frac{120}{12} = 10$`$2`. p^x = 0.52^2 = 0.27043
. $$(1-p)^{n-x} = 0.48^3 = 0.110592$$10\times 0.2704 \times 0.110592 = 0.2990$$
Thus, the probability of selecting exactly two underpriced stocks during the week is 0.2990 or 29.90%.
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