Probability of Stocks A and C Increasing | CFA Level 1 Exam Answer

Probability of Stocks A and C Increasing

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Question

Suppose that stocks A, B, C, and D are independent with respect to their price movement, and have probabilities of increasing of 0.25, 0.50, 0.40, and 0.30. What is the probability that stocks A and C will increase in price, while stocks B and D fail to increase?

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A. B. C. D.

C

If events are independent, then the joint probability of them occurring together is just the product of the individual probabilities. So P(AC) = 0.25 * 0.40 = 10%. To this, we multiply the probabilities of B and D failing to increase: 10% * (1 - 0.50)*(1 - 0.30) = 3.5%.

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