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CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns

A binomial random variable is defined as the number of successes in a fixed number of independent trials. Which of the following is most likely a defining feature of a Bernoulli trial that underlies this distribution?

A Bernoulli trial has exactly two possible outcomes, success or failure, with a constant probability of success. The binomial distribution counts successes over a fixed number of independent such trials, so changing probabilities or unlimited trials do not describe it.

  1. AEach trial has two possible outcomesCorrect
  2. BThe probability of success changes after each trial
  3. CThe number of trials is unlimited

Explanation

A Bernoulli trial has exactly two outcomes, success or failure, with a constant probability of success. A binomial variable counts successes across n independent identical trials. A changing success probability or unlimited trials would contradict the binomial setup.

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