- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 4. Common Probability Distributions
- Subject 1. Introduction and Discrete Random Variables
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. |