CFA Practice Question

CFA Practice Question

Carlson Jewelers permits the return of their diamond wedding rings, provided the return occurs within two weeks of the purchase date. Their records reveal that 10 percent of the diamond wedding rings are returned. Five rings are bought by five different customers. What is the probability that none will be returned?
A. 0.590
B. 0.372
C. 0.073
Explanation: This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(pr)[q(n-r)]/r!(n-r)!. Here n = 5, r = 0,p = 0.10 and q = 0.90. Therefore we have 5!(0.10)(0.95)/0!5! = 0.590.

User Contributed Comments 5

User Comment
G3cc0 this question can also intuitavely be calculated at .9^5=.590
patra thanks G3cc0!
takor G3cc0; 0.9^5 is not intuition. It is an algebraic reduction of the binomial term at last line of the explanation above.Intuition assists mastery of the concepts?
apiccion nCn = 0Cn = 1
jjhigdon Note that C3cc0's shortcut only works if the r in nCr is 0. If it's not (e.g. what is the pobability that 3 or 4 or two or less, etc get returned?), you need to know the full binomial probability fomula.
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