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JohnsPrincess · Sep 10, 2007, 07:47 AM

I do not understand Statistics at all and so will probably be posting here a lot in the next week as I try to finish up this class.

What I'm currently stuck on is "probability".

I'm asked:
"What is the probability that your company's stock price will increase if the DJIA increases? (Hint: What you are looking for is the probability that the stock price will rise GIVEN that the DJIA has risen. This is a conditional probability that you must compute from the data you've been collecting.)"

What I've collected is the closing price of a company, the date, and the closing price of the DJIA for a few weeks.

I'm not asking anyone to compute this for me (so I'm not putting the data in here, unless it's needed to figure out what I need). What I need is to know what I do to actually compute the probability of this. I have NO idea where to start.

ebaines · Sep 10, 2007, 07:57 AM

I would suggest you review your data, and for each day that the DJIA went up, see whether the price of your stock also rose. So, for example, if the DJIA went up on 15 different dates, and on those same dates your stock went up 12 times, then the prob that your stock rises given that the DJIA rises is 12/15, or 80%.

More formally, what you are doing is a conditional probability calculation that looks like this:

P(A|B) = P(A&B)/P(B).

Where A = your stock goes up, B = DJIA goes up. So, probability of A given B is the probability that they both go up divided by the probability that the DJIA goes up. Using the same example I gave above, suppose you had taken data for 28 days, and the DJIA went up on 15 of those days, and both your stock and the DJIA went up on 12 days; then this calculation is:

P(your stock goes up GIVEN DJIA goes up) = P(your stock goes up & DJIA goes up)/(P(DJIA goes up) = (12/28)/(15/28) = 12/15 = 0.8. just as above.

JohnsPrincess · Sep 10, 2007, 08:10 AM

Thank you!

So - I took down the data over 12 days. Out of those 12 days, the DJIA rose 5 times and my stock rose 4 times.
P = (4/12)/(5/12) = 4/5 = .8 = 80%

So the probability that my stock will increase if the DJIA increases is 80%?

ebaines · Sep 10, 2007, 08:18 AM

Yep.

JohnsPrincess · Sep 10, 2007, 08:24 AM

YES! Thank you! It's sooo much easier when I see what I need to do. I just never understand what to use to figure things out or why. I'll be back with more questions, I'm sure.