Statistics Guide: Solving the January Theory Stock Market Problem

Student Question: According to the “January theory” if the stock market is up for the month of January, it will be up for the year. If it is down in January,it will be down for the year. According to an article in The Wall Street Journal, this theory held for 28 out of the last 34 years. Suppose there is no truth to this theory; that is, the probability it is either up or down is 0.5.

What is the probability this could occur by chance?

Although it may seem complicated, this problem is just a simple binomial distribution. We can solve it by using the =BINOMDIST method in excel. You can set up your cells using the value below.

excel format for solving the January theory problem

Excel format for solving the January theory problem

=BINOMDIST(C3,C4,C2,FALSE)

This should give a result of 0.000078 or 0.0078%

 

  • Student: Brandy Golden
  • Textbook: Business Statistics
  • Course: QNT 351
 
 

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