CFA Practice Question

There are 410 practice questions for this study session.

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?

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
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