CFA Practice Question

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CFA Practice Question

Consider the following events:

S1: Fed decreases interest rates in the first quarter of 2012
S2: Fed increases interest rates in the first quarter of 2012
S3: Fed leaves interest rates unchanged in the first quarter of 2012
X: Earnings per share for a certain stock

We have the following information:
P(S1)=0.65, P(S2)=0.10, P(S3)=0.25, E(X|S1)=1.75, E(X|S2)=1.50, E(X|S3)=1.67

What is the unconditional expected value of the EPS?

A. $1.64
B. $1.69
C. $1.705
Correct Answer: C

The unconditional expected value is calculated as follows: E(X) = 1.75(0.65) + 1.50(0.10) + 1.67(0.25) = $1.705.

User Contributed Comments 6

User Comment
mrushdi good question
harpalani Guys, I'm clueless on this. I thought the given answer is "conditional" expected value and NOT "unconditional" expected value. Can someone pls.share thoughts on this?
joywind @harpalani, the answer is "unconditional" expected value, a sum of those "conditional" expected values under different conditions
idzani Technically by summing the individual E(x)s you are getting the expected value for all circumstances i.e. unconditional
choas69 good explanation idzani
Huricane74 The easiest and fastest way to do this is on the calculator by entering value for X and Y using the [DATA] and [STAT] function.
Set up a table to make sure you are entering the values correctly.
Toggle down until you get to the function:
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