CFA Level 1 Question of the Week – Quantitative Methods

The correct answer is C.

Since it’s a binomial distribution, we will solve the question with the help of the Bernoulli trial method. 

The probability of having exactly 2 underpriced stocks in 5 trials (5 days), given that the probability of selecting an underpriced stock at any time is 52%, can be expressed as:

(n!/x!*(n-x)!) * p^x * (1 – p)^(n-x)
= 5!/(2!*3!) * 0.52^2 * (1 – 0.52)^3 
= (120/12) * 0.2704 * (0.110592)
= 0.2990

where
n is the number of trials;
x is the number of days having purchased an underpriced stock; and
p is the probability of selecting an underpriced stock.