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end of 5 trading days

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end of 5 trading days

by sanju09 » Tue Jul 27, 2010 1:54 am
Every trading day, the price of CF Corp stock either goes up by $1 or goes down by $1 with equal likelihood. At the end of 5 trading days, what is the probability that the price of CF Corp stock is up by exactly $3 from its initial price?
(A) 1/16
(B) 1/8
(C) 5/32
(D) 9/32
(E) 3/8

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by 4GMAT_Mumbai » Tue Jul 27, 2010 2:19 am
Hi,

Total number of possibilities = 2 ^ 5 = 32.

Number of ways of pricing going up by $5 = 1 = 5C0

Number of ways of pricing going up by $3 = 5 = 5C1

Number of ways of pricing going up by $1 = 10 = 5C2

Number of ways of pricing going down by $1 = 10 = 5C3

Number of ways of pricing going down by $3 = 5 = 5C4

Number of ways of pricing going down by $5 = 1 = 5C5

Hence, P(price to go up by exactly $3) = 5 / 32.

Hope this helps. Thanks !
Naveenan Ramachandran
4GMAT, Dadar(W) & Ghatkopar(W), Mumbai
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