CFA CFA Level 1 Question of the Week – Quantitative Methods

Question of the Week – Quantitative Methods

  • This topic has 3 replies, 2 voices, and was last updated Oct-18 by AdaptPrep.
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    • AdaptPrep
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      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%
    • AdaptPrep
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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

    • aaronpcjb
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      > @AdaptPrep said:
      > We will use a binomial distribution with p = 0.85 and n = 10. We want to calculate:

      You said you set n = 10, did you not mean n = 8?

    • AdaptPrep
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      Yes, we meant n = 8, not 10. Good catch!

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