"quantity"exercise:Probability Concepts
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Questions 1:
If the probability for an event Z is 14% (i.e., P(Z) = 14%), the odds for Z are closest to:
A 、0.163.
B、 0.071.
C、 0.123.
Questions 2:
Assuming no short selling, a diversification benefit is most likely to occur when the correlations among the securities contained in the portfolio are:
A 、greater than +1.
B、 equal to +1.
C、 less than +1.
A is correct. Odds are calculated as P(Z)/[1 – P(Z)]. In this problem, 0.14/0.86 = 0.16279 ~ 0.163.
B is incorrect. It is calculated as the inverse of 14: 1/14 = 0.07143.
C is incorrect. It is calculated as P(Z)/[1 + P(Z)] =0.14/(1 + 0.14) = 0.12281
C is correct. As long as security returns are not perfectly positively correlated, diversification benefits are possible.
A is incorrect; correlation cannot be greater than positive one.
B is incorrect; if correlations equal 1, no diversification benefit occurs.
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