A believer in the random walk theory of stock markets thinks that an index of st

Question

A believer in the random walk theory of stock markets thinks that an index of stock prices has probability 0.35 of increasing in any year. Moreover, the change in the index in any given year is not influenced by whether it rose or fell in earlier years. Let x be the number of year among the next five years in which the index rises. (a) x has a binomial distribution. What are n and p? n = p = (b) What are the possible values that X can take? (c) Find the probability of each value of X. Draw a probability histogram for the distribution of X.

Explanation / Answer

Answers to all parts a , b and c

a. p =.55
n = 5

b. 0,1,2,3,4,5

c. P(X=0) = 0.0185
P(X=1) = 0.1128
P(X=2) = 0.2757
P(X=3) = 0.3369
P(X=4) = 0.2059
P(X=5) = 0.0503

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