The recent weekly trends of two particular stock prices can best be described by the joint probability distribution shown below.
Weekly trends in two stock prices
|
|
Stock 2
|
|
|
|
|
Increases
|
Remains constant
|
Decreases
|
|
Stock 1
|
Increases
|
0.05
|
0.05
|
0.10
|
|
Remains constant
|
0.05
|
0.20
|
0.25
|
|
Decreases
|
0.10
|
0.05
|
0.15
|
a. What is the probability that the price of stock 1 will not increase in the coming week?
b. What is the probability that the price of stock 2 will change in the coming week?
c. What is the probability that the price of stock 1 will not decrease, given that the price of stock 2 remains constant in the coming week?
d. What is the probability that the price of stock 2 will change, given that the price of stock 1 changes in the coming week?
e. Why is it impossible to find the correlation between the typical weekly movements of these two stock prices from the information given? Nevertheless, does it appear that they are positively or negatively related? Why? What are the implications of this result for choosing an investment portfolio that may or may not include these two particular stocks?
Albright, S. Christian; Winston, Wayne; Zappe, Christopher (2010-10-12). Data Analysis and Decision Making (Page 189). Cengage Textbook. Kindle Edition.