CFA Practice Question

There are 434 practice questions for this study session.

CFA Practice Question

The St. Helens Insurance Company can maintain its risk-based capital ratio, or improve upon it, if its net income is at least $125 million. If earnings can fall anywhere from -$50 million to $500 million with equal probability, what is the likelihood the company can improve its risk-based capital ratio?
A. 68.2%
B. 67.3%
C. 69.1%
Explanation: This is a continuous uniform distribution, where b = $500 million and a = -$50 million. F(x) = (x - a)/ (b - a) for a < x < b; F(x) = 0 for x <= a, and F(x) = 1 for x >= b. We are solving for 1 - F(125) = 1 - (125 - (-50))/(500 - (-50)) = 1 - 175/550 = 68.2%.

User Contributed Comments 4

User Comment
tanyak Can someone explain this question?
micheleus improve their risk-based capital means: from 126 to 500 ---> P = 550-125 = 375.
range of risk-base captital ratio: -50 to 500 ---> total P= 550.
P(improve)=375/550=68.18%
capitalpirate thx micheleus.. clear and concise
aakash1108 good question! reality check!
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