Ask Your Teacher The "random walk" theory of securities prices holds that price movement is disjoint time periods which independent of each other. Suppose that we only record whether the price is up and down per year. The probability that our portfolio rises in price in any one year is 0.65. Give all answers with 2 decimal places.

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Mathematics

Jorge

17 August, 06:21

Ask Your Teacher The "random walk" theory of securities prices holds that price movement is disjoint time periods which independent of each other. Suppose that we only record whether the price is up and down per year. The probability that our portfolio rises in price in any one year is 0.65. Give all answers with 2 decimal places.

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Andre Crawford · Answer 1

A: Since disjoint, P (up AND up AND up) = P (up) P (up) P (up) =.653=.27

A: Disjoint, so previous years have no effect on this year. 1-.65 =.35

A: Same direction; two different probabilities. P (up AND up) =.652 =.42. P (down AND down) =.352=.12 ...42 +.12 =.55