Question

Between 1896—when the Dow Jones index was created— and 2012, the index rose in 65% of the years. 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 (modeling Dow Jones index), what assumption of the binomial distribution might not be valid? Are the years independent?

Answer 1

Answer:

a) P(x) = 0.67

b)  P(y) = 0.67

c) P(x=4) = 0.3325

d) P( x = 0 ) = 0.0039

e) The fact that the rise and fall of the stock market relies on market sentiments violates independence used in Binomial distribution and the years are independent

Step-by-step explanation:

A) The probability that the stock market will rise next year = P(x) = 0.67

assuming next year to be X

B) Probability that the stock market will rise the year after next year

= P(y) = 0.67 and this is because the probability is independent of that of the previous years

C) Probability that the stock market will rise in four of the next five years

= P(x=4) = 0.3325

D) probability that the stock market will rise in none of the next five years

= P( x = 0 ) = 0.0039

E) The fact that the rise and fall of the stock market relies on market sentiments violates independence used in Binomial distribution and the years are independent