CFA CFA Level 1 CFA Level 1 Question of the Week – Quantitative Methods

CFA Level 1 Question of the Week – Quantitative Methods

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    • Matt_AnalystPrep
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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, the probability of selecting exactly two underpriced stocks during the week out of the universe of underpriced and overpriced stocks is closest to:

      • A. 39.5%
      • B. 20.8%
      • C. 29.9%
    • Lilynguyen_2195
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      Who can explain this? Plz tell me

    • Matt_AnalystPrep
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      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.

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