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For 300 trading days, the daily closing price of a stock (in $) is well modeled by a Normal model with mean $196.12 and standard deviation $7.14 According to this model, what is the probability that on a randomly selected day in this period the stock price closed as follows.

a) above $203.267
b) below $210.407
c) between $181.84 and $210.407
d) Which would be more unusual, a day on which the stock price closed above $208 or below $1807

1 Answer

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Final answer:

The probability of the stock price closing above $203.267 is approximately 0.1587. The probability of the stock price closing below $210.407 is approximately 0.9772. The probability of the stock price closing between $181.84 and $210.407 is approximately 0.9521. A closing price above $208 would be more unusual compared to a closing price below $180.

Step-by-step explanation:

To find the probabilities, we need to standardize the values using the z-score formula:

z = (x - mean) / standard deviation

a) To find the probability of the closing price being above $203.267, we first calculate the z-score:

z = (203.267 - 196.12) / 7.14 = 1.00

Using a standard normal distribution table or calculator, we find that the probability of a z-score being greater than 1.00 is approximately 0.1587. Therefore, the probability is approximately 0.1587.

b) To find the probability of the closing price being below $210.407, we calculate the z-score:

z = (210.407 - 196.12) / 7.14 = 2.00

The probability of a z-score being less than 2.00 is approximately 0.9772. Therefore, the probability is approximately 0.9772.

c) To find the probability of the closing price being between $181.84 and $210.407, we need to calculate the z-scores for both values:

z1 = (181.84 - 196.12) / 7.14 = -1.99

z2 = (210.407 - 196.12) / 7.14 = 2.00

Using the standard normal distribution table or calculator, we find that the probability of a z-score being between -1.99 and 2.00 is approximately 0.9754 - 0.0233 = 0.9521. Therefore, the probability is approximately 0.9521.

d) To determine which is more unusual, a closing price above $208 or below $180, we need to calculate the z-scores:

For $208: z = (208 - 196.12) / 7.14 = 1.66

For $180: z = (180 - 196.12) / 7.14 = -2.26

Based on the z-scores, a closing price above $208 would be more unusual as the corresponding z-score is smaller than the z-score for $180. The z-score of -2.26 indicates a more extreme value.

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