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Basic Question 4 of 7
The organizers of an outdoor event know that the success of the event depends on the weather. It costs $50,000 to stage the event. If the weather is favorable, the organizers will take in $200,000. If the weather is moderate, the organizers will take in $80,000. If the weather is unfavorable, the organizers will be forced to abandon the event, and thus take in $0. The weather bureau forecasts that the chances of favorable, moderate, and unfavorable weather are 20%, 30%, and 50%, respectively.
II. E(X|M) = 80,000
III. E(X|U) = 0
IV. E(X) = 200000*0.2 + 80000*0.3 + 0*0.5 = 64000
Assume: X = revenue, F = favorable weather, M = moderate weather, U = unfavorable weather.
When calculating the expected value:
I. Expected value (Revenue| Favorable weather) = 200,000
II. E(X|M) = 80,000
III. E(X|U) = 0
IV. E(X) = 200000*0.2 + 80000*0.3 + 0*0.5 = 64000
Which statement(s) is (are) TRUE?
User Contributed Comments 8
| User | Comment |
|---|---|
| fmhp | what about the initial $50000 to stage the event? Should be mentioned that this is included in the money earned or not. |
| NikolaZ | Only IV is correct using the total probability rule. I, II, III are correct using the conditional probability rule. |
| leftcoast | fmhp - X = revenue, as in before any costs are deducted. |
| nabilhjeily | i agree with nicolaz the other are conditional read the question man... |
| Amrokken | is/are true...key words |
| choas69 | whenever the answers are with old greek then its multi right answer |
| forry9er | @choas69 ... no questions on the CFA are presented in the "Old Greek" fashion. Beating the Analystnotes questions isn't the key to preparation. |
| khalifa92 | nicely said |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
formulate an investment problem as a probability tree and explain the use of conditional expectations in investment application
CFA® 2025 Level I Curriculum, Volume 1, Module 4.