Question

An investor owns three common stocks. Each stock, independent of the others, has equally likely chances of (1) increasing in value, (2) decreasing in value, or (3) remaining the same value. List the possible outcomes of this experiment

Answer 1

Let ,

I be the event that a stock price increases,

D be the event that it decreases, and

R be the event that it remains the same.

For each stock, P(I) = P(D) = P(R) = 1/3

For each stock, any of these three cases may happen.

Therefore, total number a possible outcomes = 3 * 3 * 3=27.

Some of the outcomes are : (1,1,1), (I,I,D), (I,D,I), (D,I,I), (I,RR, (I,D,R) and so on.

P(at least two stocks increase in value) = P(only two stocks increase in value, and the other one either remains same or decreases) + P(all increase in value)

= 3 * 1/3 * 1/3 * 2/3 + (1/3)³

= 2/9 + 1/27

= 0.259