Calculate Probability that at least 1/4 stocks will be a total loss, given 40% of all stocks are at a total loss

probabilitystatistics

Homework Question –

Suppose 40% of the “risky” stocks will end up in a total loss. However “risky” stocks provide high rewards, therefore you decide to invest in four “risky” stocks. Assume that the performance of “risky” stocks are independent, the probability that at least one of them will become a total loss is closest to:

(a) 0.0256(b) 0.4(c) 0.7(d) 0.8704(e) 0.9744

Best Answer

For at least one stock to be a total loss, is for it to not be the case that all stocks are not total losses.

If the probability of $X$ happening is $P(X)$ then the probability of $X$ not happening is $1-P(X)$.

So the probability of at least one stock being a total loss is $1 -$ the probability that all stocks are not total losses.

If the probability of $X$ is $P(X)$, then the probability of $X$ occurring $n$ times out of $n$ is $(P(X))^n$.

So the probability that all stocks are not total losses is $($the probability one stock is not a total losses$)^4$.

And repeating myself: If the probability of $X$ happening is $P(X)$ then the probability of $X$ not happening is $1-P(X)$.

So the probability that one stock is not a total loss is $1 -$ probability that a stock is a total loss.

And probability that a stock is a total lose is $0.4$.

Related Question