Using the following table answer the questions below: Count the number of days i

Question

Using the following table answer the questions below:

Count the number of days in which the stock price dropped compared to the previous day's price. These 10 days are representative of the companies stock price changes.

What is the probability of LMT's stock price decreasing 5 times in a 10-day period?

Repeat this process for YUM. What is the probability of YUM’s stock price decreasing 5 times in a 10-day period?

From an investment perspective, which company is more attractive based on these calculations?

Do you think a Poisson model is appropriate to describe stock price changes? Why or why not?

LMT YUM Date Adj Close Price Change Date Adj Close Price Change 6/15/2018 310.14 Increase 6/15/2018 82.62 Increase 6/14/2018 310.59 Increase 6/14/2018 83.38 Increase 6/13/2018 314.35 Increase 6/13/2018 82.59 Decrease 6/12/2018 315.16 Increase 6/12/2018 83.23 Increase 6/11/2018 319.30 Increase 6/11/2018 83.11 Decrease 6/8/2018 322.31 Increase 6/8/2018 83.18 Increase 6/7/2018 321.95 Decrease 6/7/2018 84.19 Increase 6/6/2018 319.91 Decrease 6/6/2018 83.61 Decrease 6/5/2018 320.02 Increase 6/5/2018 82.91 Decrease 6/4/2018 318.17 Decrease 6/4/2018 82.29 Decrease

Explanation / Answer

solving first 4

LMT

increase:7/10

decrease:3/10

p(decrease=5) = 10C5 (3/10)^5 (7/10)^5 = 0.1029193

YUM

increase:5/10

decrease:5/10

10C5 (5/10)^5 (5/10)^5=0.2460938

clearly, investment 2 is better

poissio

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