### CFA Practice Question

There are 985 practice questions for this topic.

### 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

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 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