A portfolio manager has a tight tracking error of 50 basis points. The manager expects to be within this tracking error for a given quarter 85% of the time. If that expectation is correct and each quarter is independent, the probability that the manager is within the tracking error for at least 7 of the next 8 quarters is closest to: 35% 65% 75%

We will use a binomial distribution with p = 0.85 and n = 10. We want to calculate: Pr(X >= 7) = Pr(X = 7) + Pr(X = 8) Pr(X = 7) = (8 choose 7) * (0.85)^7 * (1 – 0.85)^(8 - 7) = 0.3847 Pr(X = 8) = (8 choose 8) * (0.85)^8 * (1 – 0.85)^(8 - 8) = 0.2725 Pr(X >= 7) = 0.3847 + 0.2725 = 0.6572

Question Of The Week - Quantitative Methods (9) - CFA Level 1

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This topic has 3 replies, 3 voices, and was last updated Mar-204:01 pm by moyo.

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- Nebby
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  - CFA Level 1
  28 Jan 2020 at 12:30 am
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  Why does n = 10?
- AdaptPrep
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  02 Nov 2017 at 8:47 am
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  We will use a binomial distribution with p = 0.85 and n = 10. We want to calculate:
  Pr(X >= 7) = Pr(X = 7) + Pr(X = 8)
  Pr(X = 7) = (8 choose 7) * (0.85)^7 * (1 – 0.85)^(8 – 7) = 0.3847
  Pr(X = 8) = (8 choose 8) * (0.85)^8 * (1 – 0.85)^(8 – 8) = 0.2725
  Pr(X >= 7) = 0.3847 + 0.2725 = 0.6572
- moyo
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  11 Mar 2020 at 4:01 pm
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  How are you ?I am looking for whatsapp group ,preferably in South Africa
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