- CFA Exams
- 2021 CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 7. Statistical Concepts and Market Returns
- Subject 6. Measures of Dispersion

###
**CFA Practice Question**

You are one of 8 stock analysts covering EndRun, a pioneer in off-balance-sheet-financing. Seven analysts believe the company is worth $1 million, while you think the firm has a net worth of $1.00. What is the mean absolute deviation of the estimated net worth from the average?

B. $218,749.78

C. $447,058.85

A. $9,117,058.35

B. $218,749.78

C. $447,058.85

Correct Answer: B

First, we find the average of the estimates: 7*$1 million + 1.00 = $7,000,001. Dividing that by 8 analysts gives $875,000.13. Eight of the analysts will differ from the mean by $124,999.87, and one will differ from the mean by $874,999.13. Next, we take 7 * $124,999.87 + 1 * $ = 874,999.13 $1,749,998.20. Dividing by 8 analysts gives the mean absolute deviation: $218,749.78.

###
**User Contributed Comments**
11

User |
Comment |
---|---|

rinkoo |
7*$1000000 + 1.00 = $7000001 divide 7000001/8 = 875000.13 for 7 analyst they wud differ $1000000-$875000.13 = $124999.87 for 1 analyst = $875000.13-$ 1 = $ 874999.13 7* $ 124999.87 + 1*$ 874999.13 = $ 1749998.20 $1749998.20/8 = $ 218747.78 just making the steps clearer |

danrow |
much better. Thanks |

olagbami |
why we dividing by 8 and not 7? |

RSmith |
Because there are 8 analysts, and this is not the variance (or standard deviation) we are calculating. |

rohits79 |
The net worth of the company will remain 1 million even if seven analyst talks about it, shouldn't we be using 1M + 1 in our calculation instead? |

cfaajay |
Either u or other 7 are doing useless analysis. |

2014 |
Its simple, Textbook says MAD is always less than or equal to SD. So, SD for this is 353,553 so obvious choice is B |

johntan1979 |
Hidden message in the question... EndRun sounds like? ;) |

jasonkwk |
ENRON!!!!!!!! |

bwhitele |
Explanation makes perfect sense just got stuck on solution for a second as there is a slight typo towards the end. It should read 7*124999.87 + 1*874999.13 = 1749998.2 and then divide that by 8 |

choas69 |
understand the concept then its easy |