Stock Market Return Data: Probability of Negative or High Returns | CFA Level 1 Exam

Probability of Negative or High Returns

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Question

The following stock market return data were observed last year:

Returns# of stocks -

less than -5% 129

between -5% and 0% 301

between 0% and 10% 636

between 10% and 20% 274

more than 20% 173

The probability that a randomly selected stock had either a negative return or a return more than 20% equals ________.

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A. B. C. D.

D

For a frequency distribution, the estimated probability of a particular class/event occurring equals the relative frequency of that class. Now, the number of stocks that had either a negative return or a return more than 20% equals 129 + 301 + 173 = 603. The total number of stocks equals 129 + 301 + 636 + 274 + 173 =

1513. Therefore, the estimated probability of a randomly selected stock having either a negative return or a return more than 20% equals 603/1513 = 0.40.

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