CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns
Which of the following random variables is most likely best modeled as a discrete random variable?
The number of defaults in a portfolio of 50 loans is the discrete random variable, because it can only take countable values from 0 to 50. Daily index returns and elapsed time between trades can take any value in a range, so they are continuous.
- AThe number of trades that default in a portfolio of 50 loans over one yearCorrect
- BThe exact return on a stock index over one day
- CThe time elapsed between two consecutive trades in a stock
Explanation
A discrete random variable takes a countable number of distinct values. The number of defaults out of 50 loans can only be 0, 1, 2, ..., 50. Index return and elapsed time can take any value within a range, so they are continuous.
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