- CFA Exams
- CFA Level I Exam
- Study Session 3. Quantitative Methods (2)
- Reading 9. Common Probability Distributions
- Subject 1. Basic Definitions

###
**CFA Practice Question**

Which of the following statements is incorrect?

B. Probability density function always refers to a continuous random variable.

C. The quoted stock price on the New York Stock Exchange is always a continuous random variable.

A. The interest rate is a continuous variable.

B. Probability density function always refers to a continuous random variable.

C. The quoted stock price on the New York Stock Exchange is always a continuous random variable.

Correct Answer: C

This statement is incorrect because stock price is a discrete variable.

###
**User Contributed Comments**
17

User |
Comment |
---|---|

danlan |
Why is the price discrete? |

JP09 |
Stock prices have a finite number of possible values i.e. whole pennies. Stock prices cannot be $34.4567321586 |

surob |
I think the question is tricky. Be careful. |

steved333 |
Yes, tricky, but even if price is in denominations as low as 32nds, that's still as precise as it's going to get... |

MattNYC |
Stock market RETURNS are continuous random variables, but prices are discrete. Cannot go any lower than 0 so prices cannot be infinite. |

aakash1108 |
good point MattNYC |

ilgibe |
Stock Prices CAN be infinite on the upward side. But are discrete because their smallest change is their specified tick. i.e. A share can be worth $20,90 or $20,91 but not $20,915 untill it is allowed by the stock exchange. |

alallstar |
why is B true? |

cleopatraliao |
Good point ilgibe. What MattNYC says it's kinda misleading;P |

ThomasDess |
Firstly I thought Interest Rate is a continuous! But after reading the above points I guess the same reasoning could be applied about IR; given that the IR are commonly quoted/rounded to 2 or 4 decimal places.. By the way, is the IR are really rounded to some decimal? So could we really talk about some "smallest specified" or commonly used change when modiffing IR? |

student111 |
So Interest rates are also discrete? |

Kaloyan |
To student111: Interest rate is a continuous random variable. |

johntan1979 |
Being quoted or rounded doesn't make it a discrete variable. It is rounded for easier communication purposes but when used for calculations, the "unrounded" rate is used. |

allodrfc |
Return has a minimum of -100% which would make it not continuous? |

marianne19 |
zu c price are finite not under zero. |

xp_acctant |
Is 'always' key to the answer here? |

jstid40 |
If stock price is a Discrete variable then surely height is also. |