Chris owns two stocks, IBM and General Electric (GE). The probability that IBM s

Question

Chris owns two stocks, IBM and General Electric (GE). The probability that IBM stock will increase in value next year is 0.7 and the probability that GE stock will increase in value next year is 0.8. Assume the two stocks are independent. 1. What is the probability that both stocks will increase in value next year? 2. What is the probability the IBM stock appreciates but the GE does not in value next year? 3. W hat is the probability that at least one of these stocks increase in value during the next year?

Explanation / Answer

Let ,in next year

Increment of IBM stock value=X

Increment of GE stock value=Y.

P(X)=0.7,P(Y)=0.8

The 2 stocks are independent.

So,

1.P(XY)=P(X)*P(Y)=0.7*0.8=0.56

2.

X and Y are independent ,so X and Y' are also independent

P(XY')=P(X)*P(Y')=P(X) *(1-P(Y))=0.7*(1-0.8)=0.7*0.2=0.14.

3.P( at least one increase in value)=P(XY') +P(X'Y)+P(XY)

=0.14+((1-0.7)*0.8)+0.56

=1.

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