CFA Practice Question

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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.

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
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