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    Suppose we have two stocks, stock A and stock B. Suppose that each stock has the following probabilities of decreasing (D), remaining unchanged (U) and rising (R), and that they are independent.
    Stock A: P(D)=.2, P(U)=.1 and P(R)=.7

    Stock B: P(D)=.3, P(U)=.3 and P(R)=.4

    Let X=0,1,2 be the the number of stocks that RISE. Thus, x is a random variable. FIND THE CORRESPONDING PROBABILITIES P(0), p(1), and P(2). Verify that this turns out to be a probability distribution.

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    Solution Preview

    (a) P(X) = Probability that X stocks will rise

    P(0) = P(Neither stock will rise) = P(A will not rise) * P(B will not rise)

    = (1 - ...

    Solution Summary

    The probability of unchanged independent variables are determined. Neat and step-by-step solutions are provided.