CFA Practice Question

There are 434 practice questions for this study session.

CFA Practice Question

You are studying the finances of a life insurance company. You believe that if Company X generates at least $150 million in earnings this year, they will pay a large amount of stock into a company bonus pool. If the earnings can fall anywhere from $110 million to $165 million with equal probability, what is the likelihood they will hit the bonus pool target?
A. 27.5%
B. 27.3%
C. 26.5%
Explanation: This is a continuous uniform distribution, where b = $165 million and a = $110 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(150) = 1 - (150 - 110)/(165 - 110) = 1 - 40/55 = 27.3%.

User Contributed Comments 3

User Comment
Kuki I thought of it this way...
Probability of earning every million over $110m = 1/(165-110) = 1.82%
Therefore, to hit the bonus pool target, you will need anything above $150m to $165m (at the most) = $15m max.
Therefore probability of achieving the target is 15*1.82% = 27.3%

Hope i made sense!
pochuevalex My calcs were much alike Kuki's

165-110=55 mio
165-150=15 mio
15/55=0.2727 hope that also makes sence))
vinoth84 Thanks Pochuevalex
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