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The ball is not replaced from where it is picked from. There is always a $5\%$ chance you will pick a red ball.

Is it $0.05\times0.05\times0.05$?

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    ))) ehehe it is really funny. Everywhere there are some red balls with some probability ohh perhaps some pink ones too!2012-08-12

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To be serious for a second, drawing balls without replacement are naturally going to be considered independent draws. If you start with 5% red balls and draw a red then since you do not repace you have less than 5% red balls for the second draw. Also if you do not pick red you then have more than 5% red balls to select from. An exact answer cannot be given without knowing N the total number of balls to draw from. If N is very large the probability will be less than but close to (0.05)$^3$.