Question

Which of the following most accurately describes how to standardize a random variable X?

A. Subtract the mean of X from X, and then divide that result by the standard deviation of X.

B. Subtract the mean of X from X, and then divide that result by the standard deviation of the standard normal distribution.

C. Divide X by the difference between the standard deviation of X and the standard deviation of the standard normal distribution.

Answer = A

There are two steps in standardizing a random variable X: Subtract the mean of X from X, and then divide that result by the standard deviation of X. This is represented by the following formula: Z = (X μ)/σ.

CFA Level I

"Common Probability Distributions," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle

Section 3.2

 

 

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