Chapter 2 Exam Style Question 2.7 pg 51

[Stephan Iliffe]

Hi

Please help me understand this question.

Last year 20% of funds in the second quartile moved up to the top quartile.

This does not make sense to me since the funds can only move to a neighbouring quartile at the end of the year.

So surely it could move up to quartile 3 with probability alpha. But how to the top quartile?

Regards

 

[Darshan Mody]

The question says that there is a probability of (1-2alpha) that a fund will remain in the same quartile and where upaward or downward movements possible the probability will be equal for the upward & downward movement.

So the neighbouring quartiles for the 2nd quartile are 1st & 3rd quartiles. So it stays in the second quartile with probabilioty (1-2alpha) and goes to either 1st or 3rd quartile with the same probability alpha.

First quartile is only the top quartile and its a neighbouring quartile to second quartile so the transition is possible.

First quartile is described as the quartile relating to best performance and hence is the top quartile.
4th quartile is NOT the top quartile. Its the bottom quartile.

Hope it helps!

 

[Stephan Iliffe]

Hi Darshan

Thanks for the help.

Lol I cannot believe I thought the top quartile was the fourth quartile. This enlightenment should help in the exam!

Regards