CFA Practice Question

There are 410 practice questions for this study session.

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)=0.20, P(S2)=0.35, P(S3)=0.45, E(X)=2.8865, E(X|S2)=3.00, E(X|S3)=2.85

What is the expected value of EPS, given a decrease in the interest rate?
A. $2.28
B. $2.77
C. $2.89
Explanation: E(X|S1) is calculated as follows: E(X) = E(X|S1) x 0.2 + 3 x 0.35 + 2.85 x 0.45 = 2.8865 ==> E(X|S1) = 2.77.

User Contributed Comments 6

User Comment
raymondg could somebody explain pls
spenja you are given E(x) in the answer. You need to work out E(X|S1). You do this by solving for E(X|S1) in the equation where E(X) equals sum of all the conditional probabilities, ie. E(X) = E(X|S1)x PR(S1)+ E(X|S2)x PR(S2) + E(X|S3)x PR(S3)
rockstarchuckie could you explain further?
teje think of the total probaility rule, where we are trying to find the unconditional probability (i.e. EX) this unconditional probability is a function of the conditional probailities ...hence the equation above. We are already given the unconditional probability, all we need to do is isolate for one of the conditional probablities(i.e. x given s1)
kingirm i hate probabilities
mali97 how the earth is this an easy question
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