Dollar Stocks List
question about probabiity?
the random walk theory of securities prices holds that price movements in disjoint time periods are independent of each other. Suppose that we record only whether the price is up or down each year, and that the probability that our portfolio rises in price in any one year is 0.65.(This probability is approximatley correct for a portfolio containing equal dollar amounts of all common stocks listed on the New York Stock Exchage)
A.) what is the probability that our portfolio goes up 3 consecutive years?
B.) if you know the portfolio has risen 2 years in a row, what probability do you assign to the event that it will go down next year.
C) hat is the probability that the portfolio’s value moves in the same direction in borth of the next 2 years
A) (0.65)(0.65)(0.65)= 0.274625
B)
Let A = portfolio has risen 2 years in a row
B = portfolio will go down next year.
P(B/A) = P(A & B) / P(A)
P(A) = (0.65)(0.65)
P( A & B) = (0.65)(0.65)(0.35) =
P(B/A) = (0.65)(0.65)(0.35) / (0.65)(0.65) = 0.35
C)
It either goes up both years or goes down both years
(0.65)(0.65)+(0.35)(0.35) =0.545
Stocks Down, Bank Failures – Dollar/Stocks inverse pattern