- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 4. Probability Trees and Conditional Expectations
- Subject 2. Probability Trees and Conditional Expectations
CFA Practice Question
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?
Correct Answer: I, II, III and IV
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 |