Question: The "random walk" theory of securities prices holds that price movements in disjoint time periods are independent on each other. Suppose that we record only whether the price is up or down each year, and that the probability that our portfolio rises in price in any one year is 0.65. (This probability is approximately correct for a portfolio containing equal dollar amounts of all common stocks listed on the NYSE).

1. What's the probability that our portfolio goes up for three consecutive years (Assume that the
   price movement is independent from past movements)?
2. If you know that the portfolio has risen in price 2 years in a row, what probability do you assign

to the event that it will go down next year?

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