Suppose that the successive daily changes of the price of a given stock are assu

Question

Suppose that the successive daily changes of the price of a given stock are assumed to be independent and identically distributed random variables with probability mass function given by

p(daily change is i)={ -3 with probability 0.05, -2 with probability 0.10, -1 with probability 0.20, 0 with probability 0.30, 1 with probability 0.20, 2 with probability 0.10, 3 with probability 0.05.}

Find the probability that the stock’s price will increase successively by 1, 2, and 0 points in the next three days?

Explanation / Answer

Since the successive daily changes of the price of a given stock are assumed to be independent and identically distributed random variables, so

P( the stock’s price will increase successively by 1, 2, and 0 points in the next three days )

= P(the stock’s price increases by 1 on day 1) + P(the stock’s price increases by 2 on day 2) +P(the stock’s price increases by 0 on day 3)

= 0.20 + 0.10 + 0.30

= 0.60

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