1), Betwgen 1896-when the Dow Jones index was created- and 2013, the index rose
ID: 3326564 • Letter: 1
Question
1), Betwgen 1896-when the Dow Jones index was created- and 2013, the index rose in 66% of the years. (Sources: M. Hulbert, "What the Past Can't Tell Investors." The New York Times, January 3, 2010, p. BU2 and bit.ly/100zwyT.) Based on this information, and assuming a binomial distribution, what do you think is the probability that the stock market will rise a. next year? b. the year after next? c. in four of the next five years? d. in none of the next five years? e. For this situation, what assumption of the binomial distribution might not be valid?Explanation / Answer
A) P(rise next year) = 0.66
B) P(rise in in the year after next) = 0.66
C) P(Rise in 4 of the next 5 years) ÷ 5C1 x 0.664 x (1-0.66)
= 0.3226
D) P(rise in none of the next 5 years) = (1-0.66)5
= 0.0045
E) The assumption that the rise and fall Dow Jones in a year is independent of previous years might not be valid. This is because, the rice and fall is actually dependent on the performance of the previous years or because of some global financial trend that last for more that a year.
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