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Quantitative Methods Q166

0. The probability that a stock’s price will change is 0.6 versus a probability of 0.4 that the stock price will not change. If there is a change, the probability of a price increase is 0.4 and the probability of a price decrease is 0.6. The unconditional probability of a price decrease is:

  • Option : B
  • Explanation : Consider the tree diagram below: The probability of a price decrease is equal to the probability of a price change times the probability of a decrease given a change = 0.6 * 0.6 = 0.36.
    Simply Easy Learning
    The probability of a price decrease is equal to the probability of a price change times the probability of a decrease given a change = 0.6 * 0.6 = 0.36.
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