CFA Practice Question

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CFA Practice Question

The probability that the Fed increases interest rates is 35%. Given the increase in interest rates (event S), it is expected that the EPS distribution for a stock is as follows:

What are the expected value and variance?

A. $1.125; 0.0076
B. $1.125; 0.0625
C. $1.2; 0.0475
Correct Answer: C

The expected value is calculated as follows: E(X|S) = 0.75 x 0.05 + 1 x 0.35 + 1.25 x 0.35 + 1.5 x 0.25 = $1.2
The variance is calculated as follows: V(X|S) = (0.75 - 1.2)2 x 0.05 + (1 - 1.2)2 x 0.35 + (1.25 - 1.2)2 x 0.35 + (1.5 - 1.2)2 x 0.25 = 0.0475

User Contributed Comments 14

User Comment
noonah Having worked out the conditional expectation as 1.2, the variance could only be positive, and hence answer is C without having to perform the calculation
tssverma good guess noonah
RichWang BA II Plus can get SIGMA (XY) = 1.2,
but can BA II Plus get variance?
How about BA II Plus Professional?
surob RichWang, can you please explain how to use SIGMA (XY)on BA II?
tagr 2ND-STAT Fill in values of table above for X and Y
2ND-STAT Push up arrow gives SigmaXY = 1.2*
bobert I am still lost on how to do it on the BAII+.
Frehner On BA II Plus Professional
2nd Data
2nd Clr Work
Fill in X for column one and Y for column two
2nd Stat
Up Arrow
bdoggprod Thanks for the info on the BAII +
strike how about for hp 12c?
raymondg Thanks for the calculator tip. Could you also calculate the varience?
jpducros For HP 12c,
0.75 enter 0.05 Sigma+
1 enter 0.35 Sigma+
1.25 enter 0.35 Sigma+
1.50 enter 0.25 Sigma+
g xbarw (in other words, number 6)
result is 1.2 is the weighted mean.
NikolaZ @ Frehner: I get 1.125 as the mean using your method, any idea why?
Shaan23 If you want to push less buttons and understand whats going on ---- DONT USE CALCULATOR HERE

Only use calculator on time value money question
Huricane74 I recommend that people do it both ways. First to understand what is going on so that you can do more complex problems later on. However, on the exam, you are pressed for time, so you have to learn how to do it on a calculator. I prefer using the BAII plus.
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