ProbabilityConcepts TestID:7658734

Question#1of117 QuestionID:413030

Anempiricalprobabilityisonethatis:

A) derivedfromanalyzingpastdata.

B) supportedbyformalreasoning.
C) determinedbymathematicalprinciples.

Explanation

Anempiricalprobabilityisonethatisderivedfromanalyzingpastdata.Forexample,abasketballplayerhasscoredatleast
22pointsineachoftheseason's18games.Therefore,thereisahighprobabilitythathewillscore22pointsintonight's
game.

Question#2of117 QuestionID:413114

TullyAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwoportfolios
fortheirclientundereachscenario.Tully'seconomisthasestimatedtheprobabilityofeachscenario,asshowninthetable
below.Giventhisinformation,whatisthestandarddeviationofexpectedreturnsonPortfolioB?

Scenario Probability ReturnonPortfolioA ReturnonPortfolioB

A 15% 18% 19%

B 20% 17% 18%

C 25% 11% 10%

D 40% 7% 9%

A) 9.51%.

B) 4.34%.

C) 12.55%.

Explanation

Scenario Probability ReturnonPortfolioB P[RBE(RB)]2

A 15% 19% 0.000624

B 20% 18% 0.000594

C 25% 10% 0.000163
D 40% 9% 0.000504
E(RB)=12.55% 2 =0.001885
=0.0434166
Question#3of117 QuestionID:413123

TheprobabilityofAis0.4.TheprobabilityofACis0.6.Theprobabilityof(B|A)is0.5,andtheprobabilityof(B|AC)is0.2.UsingBayes'
formula,whatistheprobabilityof(A|B)?

A) 0.375.

B) 0.625.

C) 0.125.

Explanation

Usingthetotalprobabilityrule,wecancomputetheP(B):
P(B)=[P(B|A)P(A)]+[P(B|AC)P(AC)]
P(B)=[0.50.4]+[0.20.6]=0.32

UsingBayes'formula,wecansolveforP(A|B):
P(A|B)=[P(B|A)P(B)]P(A)=[0.50.32]0.4=0.625

Question#4of117 QuestionID:413027

Whichofthefollowingisanempiricalprobability?

A) TheprobabilitytheFedwilllowerinterestratespriortotheendoftheyear.
B) Forastock,basedonpriorpatternsofupanddowndays,theprobabilityofthestock
havingadowndaytomorrow.
C) Onarandomdraw,theprobabilityofchoosingastockofaparticularindustryfromthe
S&P500basedonthenumberoffirms.

Explanation

Therearethreetypesofprobabilities:apriori,empirical,andsubjective.Anempiricalprobabilityiscalculatedbyanalyzing
pastdata.

Question#5of117 QuestionID:413048

Theprobabilityofeachofthreeindependenteventsisshowninthetablebelow.WhatistheprobabilityofAandCoccurring,
butnotB?

Event ProbabilityofOccurrence

A 25%

B 15%

C 42%
 A) 10.5%.
B) 8.9%.

C) 3.8%.

Explanation

Usingthemultiplicationrule:(0.25)(0.42)(0.25)(0.15)(0.42)=0.08925or8.9%

Question#6of117 QuestionID:413073

Giventhefollowingtableaboutemployeesofacompanybasedonwhethertheyaresmokersornonsmokersandwhetheror
nottheysufferfromanyallergies,whatistheprobabilityofbothsufferingfromallergiesandnotsufferingfromallergies?

SufferfromAllergies Don'tSufferfromAllergies Total

Smoker 35 25 60

Nonsmoker 55 185 240

Total 90 210 300

A) 0.00.
B) 0.50.

C) 1.00.

Explanation

Thesearemutuallyexclusive,sothejointprobabilityiszero.

Question#7of117 QuestionID:413112

Usethefollowingdatatocalculatethestandarddeviationofthereturn:

50%chanceofa12%return
30%chanceofa10%return
20%chanceofa15%return

A) 3.0%.

B) 2.5%.

C) 1.7%.

Explanation

Thestandarddeviationisthepositivesquarerootofthevariance.Thevarianceistheexpectedvalueofthesquared
deviationsaroundtheexpectedvalue,weightedbytheprobabilityofeachobservation.Theexpectedvalueis:(0.5)(0.12)+
(0.3)(0.1)+(0.2)(0.15)=0.12.Thevarianceis:(0.5)(0.120.12)2+(0.3)(0.10.12)2+(0.2)(0.150.12)2=
0.0003.Thestandarddeviationisthesquarerootof0.0003=0.017or1.7%.
Question#8of117 QuestionID:413132

Ifafirmisgoingtocreatethreeteamsoffourfromtwelveemployees.Whichapproachisthemostappropriatefordetermining
howthetwelveemployeescanbeselectedforthethreeteams?

A) Combinationformula.
B) Permutationformula.

C) Labelingformula.

Explanation

Thisproblemisalabelingproblemwherethe12employeeswillbeassignedoneofthreelabels.Itrequiresthelabeling
formula.

Inthiscasethereare[(12!)/(4!4!4!)]=34,650waystogrouptheemployees.

Question#9of117 QuestionID:413074

Afirmholdstwo$50millionbondswithcalldatesthisweek.

TheprobabilitythatBondAwillbecalledis0.80.
TheprobabilitythatBondBwillbecalledis0.30.

Theprobabilitythatatleastoneofthebondswillbecalledisclosestto:

A) 0.50.

B) 0.24.

C) 0.86.

Explanation

Wecalculatetheprobabilitythatatleastoneofthebondswillbecalledusingtheadditionruleforprobabilities:

P(AorB)=P(A)+P(B)P(AandB),whereP(AandB)=P(A)P(B)
P(AorB)=0.80+0.30(0.80.3)=0.86

Question#10of117 QuestionID:413045

Themultiplicationruleofprobabilityisusedtocalculatethe:

A) unconditionalprobabilityofanevent,givenconditionalprobabilities.

B) jointprobabilityoftwoevents.

C) probabilityofatleastoneoftwoevents.

Explanation

Themultiplicationruleofprobabilityisstatedas:P(AB)=P(A|B)P(B),whereP(AB)isthejointprobabilityofeventsAandB.
Question#11of117 QuestionID:413041

Whichofthefollowingprobabilitiesisanexampleofanunconditionalprobability?Theprobabilitythattheeconomywillentera
recession:

A) anytimeinthenextthreeyears.

B) inthenextyeariftaxratesincrease.

C) inthenexttwoyearsifinterestratesincrease.

Explanation

Anunconditionalprobabilityisonethatisnotstatedasdependingontheoutcomeofanotherevent.Aconditionalprobabilityis
statedgiventheoutcomeofanotherevent.

Question#12of117 QuestionID:413127

Aportfoliomanagerwantstoeliminatefourstocksfromaportfoliothatconsistsofsixstocks.Howmanywayscanthefour
stocksbesoldwhentheorderofthesalesisimportant?

A) 24.

B) 360.
C) 180.

Explanation

Thisisachoosefourfromsixproblemwhereorderisimportant.Thus,itrequiresthepermutationformula:n!/(nr)!=6!/(6
4)!=360.

WithTIcalculator:6[2nd][nPr]4=360.

Question#13of117 QuestionID:413032

Lastyear,theaveragesalaryincreaseforpoultryresearchassistantswas2.5%.Ofthe10,000poultryresearchassistants,2,000
receivedraisesinexcessofthisamount.Theoddsthatarandomlyselectedpoultryresearchassistantreceivedasalaryincreasein
excessof2.5%are:

A) 1to5.

B) 1to4.

C) 20%.

Explanation

Forevent"E,"theprobabilitystatedasoddsis:P(E)/[1P(E)].Here,theprobabilitythatapoultryresearchassistantreceivedasalary
increaseinexcessof2.5%=2,000/10,000=0.20,or1/5andtheoddsare(1/5)/[1(1/5)]=1/4,or1to4.
Question#14of117 QuestionID:413064

ThomasBayneshasappliedtobothHarvardandYale.BayneshasdeterminedthattheprobabilityofgettingintoHarvardis
25%andtheprobabilityofgettingintoYale(hisfather'salmamater)is42%.Bayneshasalsodeterminedthattheprobability
ofbeingacceptedatbothschoolsis2.8%.WhatistheprobabilityofBaynesbeingacceptedateitherHarvardorYale?

A) 7.7%.

B) 64.2%.

C) 10.5%.

Explanation

Usingtheadditionrule,theprobabilityofbeingacceptedatHarvardorYaleisequalto:P(Harvard)+P(Yale)P(Harvardand
Yale)=0.25+0.420.028=0.642or64.2%.

Question#15of117 QuestionID:413118

Thereisa30%chancethattheeconomywillbegoodanda70%chancethatitwillbebad.Iftheeconomyisgood,your
returnswillbe20%andiftheeconomyisbad,yourreturnswillbe10%.Whatisyourexpectedreturn?

A) 17%.

B) 15%.
C) 13%.

Explanation

Expectedvalueistheprobabilityweightedaverageofthepossibleoutcomesoftherandomvariable.Theexpectedreturnis:
((0.3)(0.2))+((0.7)(0.1))=(0.06)+(0.07)=0.13.

Question#16of117 QuestionID:413087

Thereisa90%chancethattheeconomywillbegoodnextyearanda10%chancethatitwillbebad.Iftheeconomyisgood,
thereisa60%chancethatXYZIncorporatedwillhaveEPSof$4.00anda40%chancethattheirearningswillbe$3.00.Ifthe
economyisbad,thereisan80%chancethatXYZIncorporatedwillhaveEPSof$2.00anda20%chancethattheirearnings
willbe$1.00.Whatisthefirm'sexpectedEPS?

A) $5.40.
B) $3.42.
C) $2.50.

Explanation

TheexpectedEPSiscalculatedbymultiplyingtheprobabilityoftheeconomicenvironmentbytheprobabilityoftheparticular
EPSandtheEPSineachcase.TheexpectedEPSinallfouroutcomesarethensummedtoarriveattheexpectedEPS:

(0.900.60$4.00)+(0.900.40$3.00)+(0.100.80$2.00)+(0.100.20$1.00)=$2.16+$1.08+$0.16+
$0.02=$3.42.
Question#17of117 QuestionID:485759

Thefollowingtableshowstheindividualweightingsandexpectedreturnsforthethreestocksinaninvestor'sportfolio:

Stock Weight E(RX)

V 0.40 12%
M 0.35 8%
S 0.25 5%

Whatistheexpectedreturnofthisportfolio?

A) 9.05%.

B) 8.85%.
C) 8.33%.

Explanation

Tosolvethisproblem,weneedtousetheformulafortheexpectedreturnofaportfolio:E(RP)=w1E(R1)+w2E(R2)+...+
wnE(Rn)

Multiplyingtheweightofeachassetbyitsexpectedreturn,thensumming,produces:E(RP)=0.40(12)+0.35(8)+0.25(5)=
8.85%.

Question#18of117 QuestionID:413050

Whichofthefollowingisajointprobability?Theprobabilitythata:

A) stockincreasesinvalueafteranincreaseininterestrateshasoccurred.

B) companymergeswithanotherfirmnextyear.
C) stockpaysadividendandsplitsnextyear.

Explanation

Ajointprobabilityappliestotwoeventsthatbothmustoccur.

Question#19of117 QuestionID:413033

Eachlotteryticketdisclosestheoddsofwinning.Theseoddsarebasedon:

A) aprioriprobability.

B) pastlotteryhistory.
C) thebestestimateoftheDepartmentofGaming.

Explanation

Anaprioriprobabilityisbasedonformalreasoningratherthanonhistoricalresultsorsubjectiveopinion.
Question#20of117 QuestionID:413121

GivenP(X=20,Y=0)=0.4,andP(X=30,Y=50)=0.6,thenCOV(XY)is:

A) 125.00.

B) 120.00.
C) 25.00.

Explanation

Theexpectedvaluesare:E(X)=(0.420)+(0.630)=26,andE(Y)=(0.40)+(0.650)=30.Thecovarianceis
COV(XY)=(0.4((2026)(030)))+((0.6(3026)(5030)))=120.

Question#21of117 QuestionID:413065

AveryScott,financialplanner,recentlyobtainedhisCFACharterandisconsideringmultiplejoboffers.Scottdevisedthe
followingfourcriteriatohelphimdecidewhichofferstopursuemostaggressively.

%ExpectedtoMeetthe
Criterion
Criteria

1.Within75milesofSanFrancisco 0.85

2.Employeesizelessthan50 0.50

3.Compensationpackageexceeding
0.30
$100,000

4.Threeweeksofvacation 0.15

IfScotthas20joboffersandtheprobabilitiesofmeetingeachcriterionareindependent,howmanyareexpectedtomeetall
ofhiscriteria?(Roundtonearestwholenumber).

A) 1.

B) 3.

C) 0.

Explanation

Wewillusethemultiplicationruletocalculatethisprobability.

P(1,2,3,4)=P(1)P(2)P(3)P(4)
=0.850.500.300.15=0.019125

Numberofoffersexpectedtomeetthecriteria=0.01912520=0.3825,or0.

Question#22of117 QuestionID:413124
BondsratedBhavea25%chanceofdefaultinfiveyears.BondsratedCCChavea40%chanceofdefaultinfiveyears.A
portfolioconsistsof30%Band70%CCCratedbonds.Ifarandomlyselectedbonddefaultsinafiveyearperiod,whatisthe
probabilitythatitwasaBratedbond?

A) 0.625.
B) 0.250.

C) 0.211.

Explanation

AccordingtoBayes'formula:P(B/default)=P(defaultandB)/P(default).

P(defaultandB)=P(default/B)P(B)=0.2500.300=0.075

P(defaultandCCC)=P(default/CCC)P(CCC)=0.4000.700=0.280

P(default)=P(defaultandB)+P(defaultandCCC)=0.355

P(B/default)=P(defaultandB)/P(default)=0.075/0.355=0.211

Question#23of117 QuestionID:413113

TullyAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwoportfolios
fortheirclientundereachscenario.Tully'seconomisthasestimatedtheprobabilityofeachscenario,asshowninthetable
below.Giventhisinformation,whatisthestandarddeviationofreturnsonportfolioA?

Scenario Probability ReturnonPortfolioA ReturnonPortfolioB

A 15% 18% 19%

B 20% 17% 18%

C 25% 11% 10%

D 40% 7% 9%

A) 4.53%.

B) 1.140%.
C) 5.992%.

Explanation

E(RA)=11.65%

2=0.0020506=0.15(0.180.1165)2+0.2(0.170.1165)2+0.25(0.110.1165)2+0.4(0.070.1165)2

=0.0452836

Question#24of117 QuestionID:434199
Thereisa40%probabilitythattheeconomywillbegoodnextyearanda60%probabilitythatitwillbebad.Iftheeconomyis
good,thereisa50percentprobabilityofabullmarket,a30%probabilityofanormalmarket,anda20%probabilityofabear
market.Iftheeconomyisbad,thereisa20%probabilityofabullmarket,a30%probabilityofanormalmarket,anda50%
probabilityofabearmarket.Whatistheprobabilityofabullmarketnextyear?

A) 32%.
B) 20%.
C) 50%.

Explanation

Becauseagoodeconomyandabadeconomyaremutuallyexclusive,theprobabilityofabullmarketisthesumofthejoint
probabilitiesof(goodeconomyandbullmarket)and(badeconomyandbullmarket):(0.400.50)+(0.600.20)=0.32or
32%.

Question#25of117 QuestionID:413081

AninvestorisconsideringpurchasingACQ.Thereisa30%probabilitythatACQwillbeacquiredinthenexttwomonths.If
ACQisacquired,thereisa40%probabilityofearninga30%returnontheinvestmentanda60%probabilityofearning25%.If
ACQisnotacquired,theexpectedreturnis12%.Whatistheexpectedreturnonthisinvestment?

A) 16.5%.

B) 18.3%.

C) 12.3%.

Explanation

E(r)=(0.700.12)+(0.300.400.30)+(0.300.600.25)=0.165.

Question#26of117 QuestionID:413034

Whichofthefollowingisanaprioriprobability?

A) Forastock,basedonpriorpatternsofupanddowndays,theprobabilityof
thestockhavingadowndaytomorrow.

B) TheprobabilitytheFedwilllowerinterestratespriortotheendoftheyear.
C) Onarandomdraw,theprobabilityofchoosingastockofaparticularindustryfromthe
S&P500.

Explanation

Aprioriprobabilityisbasedonformalreasoningandinspection.Giventhenumberofstocksintheairlineindustryinthe
S&P500forexample,theaprioriprobabilityofselectinganairlinestockwouldbethatnumberdividedby500.

Question#27of117 QuestionID:413102
Aninvestorhastwostocks,StockRandStockSinherportfolio.Giventhefollowinginformationonthetwostocks,the
portfolio'sstandarddeviationisclosestto:
R=34%
S=16%
rR,S=0.67
WR=80%
WS=20%

A) 29.4%.

B) 8.7%.
C) 7.8%.

Explanation

Theformulaforthestandarddeviationofa2stockportfoliois:

s=[WA2sA2+WB2sB2+2WAWBsAsBrA,B]1/2

s=[(0.820.342)+(0.220.162)+(20.80.20.340.160.67)]1/2=[0.073984+0.001024+0.0116634]1/2=
0.08667141/2=0.2944,orapproximately29.4%.

Question#28of117 QuestionID:413026

Forastock,whichofthefollowingisleastlikelyarandomvariable?Its:

A) stocksymbol.
B) currentratio.

C) mostrecentclosingprice.

Explanation

Arandomvariablemustbeanumber.Sometimesthereisanobviousmethodforassigninganumber,suchaswhenthe
randomvariableisanumberitself,likeaP/Eratio.Astocksymbolofarandomlyselectedstockcouldhaveanumber
assignedtoitlikethenumberoflettersinthesymbol.Thesymbolitselfcannotbearandomvariable.

Question#29of117 QuestionID:413025

Iftwoeventsaremutuallyexclusive,theprobabilitythattheybothwilloccuratthesametimeis:

A) Cannotbedeterminedfromtheinformationgiven.
B) 0.50.

C) 0.00.

Explanation

Iftwoeventsaremutuallyexclusive,itisnotpossibletooccuratthesametime.Therefore,theP(AB)=0.
Question#30of117 QuestionID:413094

Giventhefollowingprobabilitydistribution,findthecovarianceoftheexpectedreturnsforstocksAandB.

Event P(Ri) RA RB
Recession 0.10 5% 4%
Below 0.30 2% 8%
Average
Normal 0.50 10% 10%
Boom 0.10 31% 12%

A) 0.00032.

B) 0.00174.
C) 0.00109.

Explanation

Findtheweightedaveragereturnforeachstock.

StockA:(0.10)(5)+(0.30)(2)+(0.50)(10)+(0.10)(0.31)=7%.

StockB:(0.10)(4)+(0.30)(8)+(0.50)(10)+(0.10)(0.12)=9%.

Next,multiplythedifferencesofthetwostocksbyeachother,multiplybytheprobabilityoftheeventoccurring,andsum.This
isthecovariancebetweenthereturnsofthetwostocks.

[(0.050.07)(0.040.09)](0.1)+[(0.020.07)(0.080.09)](0.3)+[(0.100.07)(0.100.09)](0.5)+[(0.31
0.07)(0.120.09)](0.1)=0.0006+0.00027+0.00015+0.00072=0.00174.

Question#31of117 QuestionID:413060

TullyAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwoportfolios
fortheirclientundereachscenario.Tully'seconomisthasestimatedtheprobabilityofeachscenarioasshowninthetable
below.Giventhisinformation,whatistheexpectedreturnonportfolioA?

Scenario Probability ReturnonPortfolioA ReturnonPortfolioB

A 15% 17% 19%

B 20% 14% 18%

C 25% 12% 10%

D 40% 8% 9%

A) 9.25%.
B) 11.55%.

C) 10.75%.
Explanation

Theexpectedreturnisequaltothesumoftheproductsoftheprobabilitiesofthescenariosandtheirrespectivereturns:=
(0.15)(0.17)+(0.20)(0.14)+(0.25)(0.12)+(0.40)(0.08)=0.1155or11.55%.

Question#32of117 QuestionID:413077

IftheoutcomeofeventAisnotaffectedbyeventB,theneventsAandBaresaidtobe:

A) conditionallydependent.

B) mutuallyexclusive.

C) statisticallyindependent.

Explanation

Iftheoutcomeofoneeventdoesnotinfluencetheoutcomeofanother,thentheeventsareindependent.

Question#33of117 QuestionID:413067

TheprobabilityofanewWalMartbeingbuiltintownis64%.IfWalMartcomestotown,theprobabilityofanewWendy's
restaurantbeingbuiltis90%.WhatistheprobabilityofanewWalMartandanewWendy'srestaurantbeingbuilt?

A) 0.675.
B) 0.306.

C) 0.576.

Explanation

P(AB)=P(A|B)P(B)

TheprobabilityofanewWalMartandanewWendy'sisequaltotheprobabilityofanewWendy's"ifWalMart"(0.90)times
theprobabilityofanewWalMart(0.64).(0.90)(0.64)=0.576.

Question#34of117 QuestionID:413115

ForassetsAandBweknowthefollowing:E(RA)=0.10,E(RB)=0.10,Var(RA)=0.18,Var(RB)=0.36andthecorrelationof
thereturnsis0.6.Whatisthevarianceofthereturnofaportfoliothatisequallyinvestedinthetwoassets?

A) 0.1500.

B) 0.1102.

C) 0.2114.

Explanation

Youarenotgiventhecovarianceinthisproblembutinsteadyouaregiventhecorrelationcoefficientandthevariancesof
assetsAandBfromwhichyoucandeterminethecovariancebyCovariance=(correlationofA,B)StandardDeviationofA)
(StandardDeviationofB).
Sinceitisanequallyweightedportfolio,thesolutionis:
[(0.52)0.18]+[(0.52)0.36]+[20.50.50.6(0.180.5)(0.360.5)]
=0.045+0.09+0.0764=0.2114

Question#35of117 QuestionID:413047

AbondportfolioconsistsoffourBBratedbonds.Eachhasaprobabilityofdefaultof24%andtheseprobabilitiesare
independent.Whataretheprobabilitiesofallthebondsdefaultingandtheprobabilityofallthebondsnotdefaulting,
respectively?

A) 0.960000.04000.
B) 0.040000.96000.

C) 0.003320.33360.

Explanation

Forthefourindependenteventswheretheprobabilityisthesameforeach,theprobabilityofalldefaultingis(0.24)4.The
probabilityofallnotdefaultingis(10.24)4.

Question#36of117 QuestionID:413125

Johnpurchased60%ofthestocksinaportfolio,whileAndrewpurchasedtheother40%.HalfofJohn'sstockpicksare
consideredgood,whileafourthofAndrew'sareconsideredtobegood.Ifarandomlychosenstockisagoodone,whatisthe
probabilityJohnselectedit?

A) 0.40.

B) 0.30.
C) 0.75.

Explanation

Usingtheinformationofthestockbeinggood,theprobabilityisupdatedtoaconditionalprobability:

P(John|good)=P(goodandJohn)/P(good).

P(goodandJohn)=P(good|John)P(John)=0.50.6=0.3.

P(goodandAndrew)=0.250.40=0.10.

P(good)=P(goodandJohn)+P(goodandAndrew)=0.40.

P(John|good)=P(goodandJohn)/P(good)=0.3/0.4=0.75.

Question#37of117 QuestionID:413111

Afterrepeatedexperiments,theaverageoftheoutcomesshouldconvergeto:

A) one.
 B) thevariance.

C) theexpectedvalue.

Explanation

Thisisthedefinitionoftheexpectedvalue.Itisthelongrunaverageofalloutcomes.

Question#38of117 QuestionID:434201

Aneconomistestimatesa60%probabilitythattheeconomywillexpandnextyear.Thetechnologysectorhasa70%
probabilityofoutperformingthemarketiftheeconomyexpandsanda10%probabilityofoutperformingthemarketifthe
economydoesnotexpand.Giventhenewinformationthatthetechnologysectorwillnotoutperformthemarket,theprobability
thattheeconomywillnotexpandisclosestto:

A) 54%.

B) 33%.
C) 67%.

Explanation

UsingthenewinformationwecanuseBayes"formulatoupdatetheprobability.

P(economydoesnotexpand|techdoesnotoutperform)=P(economydoesnotexpandandtechdoesnotoutperform)/
P(techdoesnotoutperform).

P(economydoesnotexpandandtechdoesnotoutperform)=P(techdoesnotoutperform|economydoesnotexpand)
P(economydoesnotexpand)=0.900.40=0.36.

P(economydoesexpandandtechdoesnotoutperform)=P(techdoesnotoutperform|economydoesexpand)P(economy
doesexpand)=0.300.60=0.18.

P(economydoesnotexpand)=1.00P(economydoesexpand)=1.000.60=0.40.

P(techdoesnotoutperform|economydoesnotexpand)=1.00P(techdoesoutperform|economydoesnotexpand)=1.00
0.10=0.90.

P(techdoesnotoutperform)=P(techdoesnotoutperformandeconomydoesnotexpand)+P(techdoesnotoutperformand
economydoesexpand)=0.36+0.18=0.54.

P(economydoesnotexpand|techdoesnotoutperform)=P(economydoesnotexpandandtechdoesnotoutperform)/
P(techdoesnotoutperform)=0.36/0.54=0.67.
Question#39of117 QuestionID:413066

PatBinder,CFA,isexaminingtheeffectofaninvertedyieldcurveonthestockmarket.Shedeterminesthatinthepast
century,75%ofthetimestheyieldcurvehasinverted,abearmarketinstocksbeganwithinthenext12months.Binder
believestheprobabilityofaninvertedyieldcurveinthenextyearis20%.Binder'sestimateoftheprobabilitythattherewillbe
aninvertedyieldcurveinthenextyearfollowedbyabearmarketisclosestto:

A) 38%.

B) 15%.
C) 50%.

Explanation

Thisisajointprobability.Fromtheinformation:P(BearMarketgiveninvertedyieldcurve)=0.75andP(invertedyieldcurve)=
0.20.Thejointprobabilityistheproductofthesetwoprobabilities:(0.75)(0.20)=0.15.

Question#40of117 QuestionID:413036

Iftheprobabilityofaneventis0.20,whataretheoddsagainsttheeventoccurring?

A) Fourtoone.
B) Onetofour.

C) Fivetoone.

Explanation

Theanswercanbedeterminedbydividingtheprobabilityoftheeventbytheprobabilitythatitwillnotoccur:(1/5)/(4/5)=1to
4.Theoddsagainsttheeventoccurringisfourtoone,i.e.infiveoccurrencesoftheevent,itisexpectedthatitwilloccuronce
andnotoccurfourtimes.

Question#41of117 QuestionID:413039

Iftheprobabilityofaneventis0.10,whataretheoddsfortheeventoccurring?

A) Onetoten.
B) Ninetoone.

C) Onetonine.

Explanation

Theanswercanbedeterminedbydividingtheprobabilityoftheeventbytheprobabilitythatitwillnotoccur:(1/10)/(9/10)=1
to9.Theprobabilityoftheeventoccurringisonetonine,i.e.intenoccurrencesoftheevent,itisexpectedthatitwilloccur
onceandnotoccurninetimes.

Question#42of117 QuestionID:413099
Withrespecttotheunitseachismeasuredin,whichofthefollowingisthemosteasilydirectlyapplicablemeasureof
dispersion?The:

A) covariance.

B) standarddeviation.

C) variance.

Explanation

Thestandarddeviationisintheunitsoftherandomvariableitselfandnotsquaredunitslikethevariance.Thecovariance
wouldbemeasuredintheproductoftwounitsofmeasure.

Question#43of117 QuestionID:413037

Acompanyhastwomachinesthatproducewidgets.Anoldermachineproduces16%defectivewidgets,whilethenew
machineproducesonly8%defectivewidgets.Inaddition,thenewmachineemploysasuperiorproductionprocesssuchthatit
producesthreetimesasmanywidgetsastheoldermachinedoes.Giventhatawidgetwasproducedbythenewmachine,
whatistheprobabilityitisNOTdefective?

A) 0.92.

B) 0.06.
C) 0.76.

Explanation

Theproblemisjustaskingfortheconditionalprobabilityofadefectivewidgetgiventhatitwasproducedbythenewmachine.
Sincethewidgetwasproducedbythenewmachineandnotselectedfromtheoutputrandomly(ifrandomlyselected,you
wouldnotknowwhichmachineproducedthewidget),weknowthereisan8%chanceitisdefective.Hence,theprobabilityitis
notdefectiveisthecomplement,18%=92%.

Question#44of117 QuestionID:413044

Whichprobabilityruledeterminestheprobabilitythattwoeventswillbothoccur?

A) Thetotalprobabilityrule.

B) Themultiplicationrule.

C) Theadditionrule.

Explanation

Themultiplicationruleisusedtodeterminethejointprobabilityoftwoevents.Theadditionruleisusedtodeterminethe
probabilitythatatleastoneoftwoeventswilloccur.Thetotalprobabilityruleisutilizedwhentryingtodeterminethe
unconditionalprobabilityofanevent.

Question#45of117 QuestionID:413054
ThefollowingtablesummarizestheresultsofapolltakenofCEO'sandanalystsconcerningtheeconomicimpactofapendingpieceof
legislation:

Thinkitwillhavea Thinkitwillhavea
Group Total
positiveimpact negativeimpact

CEO's 40 30 70

Analysts 70 60 130

110 90 200

Whatistheprobabilitythatarandomlyselectedindividualfromthisgroupwillbeananalystthatthinksthatthelegislationwillhavea
positiveimpactontheeconomy?

A) 0.30.

B) 0.45.

C) 0.35.

Explanation

70analysts/200individuals=0.35.

Question#46of117 QuestionID:413062

Giventhefollowingtableaboutemployeesofacompanybasedonwhethertheyaresmokersornonsmokersandwhetheror
nottheysufferfromanyallergies,whatistheprobabilityofsufferingfromallergiesorbeingasmoker?

SufferfromAllergies Don'tSufferfromAllergies Total

Smoker 35 25 60

Nonsmoker 55 185 240

Total 90 210 300

A) 0.38.
B) 0.88.

C) 0.12.

Explanation

Theadditionruleforprobabilitiesisusedtodeterminetheprobabilityofatleastoneeventamongtwoormoreevents
occurring.Theprobabilityofeacheventisaddedandthejointprobability(iftheeventsarenotmutuallyexclusive)is
subtractedtoarriveatthesolution.P(smokerorallergies)=P(smoker)+P(allergies)P(smokerandallergies)=(60/300)+
(90/300)(35/300)=0.20+0.300.117=0.38.

Alternatively:1Prob.(Neither)=1(185/300)=38.3%.

Question#47of117 QuestionID:413055
Thereisa50%chancethattheFedwillcutinterestratestomorrow.Onanygivenday,thereisa67%chancetheDJIAwill
increase.OndaystheFedcutsinterestrates,theprobabilitytheDJIAwillgoupis90%.Whatistheprobabilitythattomorrow
theFedwillcutinterestratesortheDJIAwillgoup?

A) 0.72.

B) 0.33.

C) 0.95.

Explanation

Thisrequirestheadditionformula.Fromtheinformation:P(cutinterestrates)=0.50andP(DJIAincrease)=0.67,P(DJIA
increase|cutinterestrates)=0.90.Thejointprobabilityis0.500.90=0.45.ThusP(cutinterestratesorDJIAincrease)=
0.50+0.670.45=0.72.

Question#48of117 QuestionID:413110

Giventhefollowingprobabilitydistribution,findthestandarddeviationofexpectedreturns.

Event P(RA) RA

Recession 0.10 5%

BelowAverage 0.30 2%

Normal 0.50 10%

Boom 0.10 31%

A) 10.04%.

B) 7.00%.

C) 12.45%.

Explanation

Findtheweightedaveragereturn(0.10)(5)+(0.30)(2)+(0.50)(10)+(0.10)(31)=7%.

Next,takedifferences,squarethem,multiplybytheprobabilityoftheeventandaddthemup.Thatisthevariance.Takethe
squarerootofthevarianceforStd.Dev.(0.1)(57)2+(0.3)(27)2+(0.5)(107)2+(0.1)(317)2=100.8=variance.

100.80.5=10.04%.

Question#49of117 QuestionID:413100

Thecovariance:

A) canbepositiveornegative.

B) mustbebetween1and+1.
 C) mustbepositive.

Explanation

Cov(a,b)=aba,b.Sincea,bcanbepositiveornegative,Cov(a,b)canbepositiveornegative.

Question#50of117 QuestionID:413117

Usethefollowingprobabilitydistributiontocalculatethestandarddeviationfortheportfolio.

StateoftheEconomy Probability ReturnonPortfolio

Boom 0.30 15%

Bust 0.70 3%

A) 6.0%.

B) 6.5%.
C) 5.5%.

Explanation

[0.30(0.150.066)2+0.70(0.030.066)2]1/2=5.5%.

Question#51of117 QuestionID:413085

Ananalystannouncesthatanincreaseinthediscountratenextquarterwilldoubleherearningsforecastforafirm.Thisisan
exampleofa:

A) conditionalexpectation.
B) useofBayes'formula.

C) jointprobability.

Explanation

Thisisaconditionalexpectation.Theanalystindicateshowanexpectedvaluewillchangegivenanotherevent.

Question#52of117 QuestionID:413075

Abagofmarblescontains3whiteand4blackmarbles.Amarblewillbedrawnfromthebagrandomlythreetimesandput
backintothebag.Relativetotheoutcomesofthefirsttwodraws,theprobabilitythatthethirdmarbledrawniswhiteis:

A) dependent.

B) independent.

C) conditional.
Explanation

Eachdrawhasthesameprobability,whichisnotaffectedbypreviousoutcomes.Thereforeeachdrawisanindependent
event.

Question#53of117 QuestionID:413103

Whatisthestandarddeviationofaportfolioifyouinvest30%instockone(standarddeviationof4.6%)and70%instocktwo
(standarddeviationof7.8%)ifthecorrelationcoefficientforthetwostocksis0.45?

A) 6.83%.
B) 6.20%.

C) 0.38%.

Explanation

Thestandarddeviationoftheportfolioisfoundby:

[W1212 +W2222 +2W1W212r1,2]0.5,or[(0.30)2(0.046)2 +(0.70)2(0.078)2 +(2)(0.30)(0.70)(0.046)(0.078)(0.45)]0.5 =0.0620,

or6.20%.

Question#54of117 QuestionID:413101

JoeMayer,CFA,projectsthatXYZCompany'sreturnonequityvarieswiththestateoftheeconomyinthefollowingway:

StateofEconomy ProbabilityofOccurrence CompanyReturns

Good .20 20%
Normal .50 15%
Poor .30 10%

ThestandarddeviationofXYZ'sexpectedreturnonequityisclosestto:

A) 3.5%.

B) 1.5%.

C) 12.3%.

Explanation

Inordertocalculatethestandarddeviationofthecompanyreturns,firstcalculatetheexpectedreturn,thenthevariance,andthestandard
deviationisthesquarerootofthevariance.

Theexpectedvalueofthecompanyreturnistheprobabilityweightedaverageofthepossibleoutcomes:(0.20)(0.20)+(0.50)(0.15)+
(0.30)(0.10)=0.145.
Thevarianceisthesumoftheprobabilityofeachoutcomemultipliedbythesquareddeviationofeachoutcomefromtheexpectedreturn:
(0.2)(0.200.145)2+(0.5)(0.150.145)2+(0.3)(0.10.145)2=0.000605+0.0000125+0.0006075=0.001225.
Thestandarddeviationisthesquarerootof0.001225=0.035or3.5%.
Question#55of117 QuestionID:413031

Whichofthefollowingstatementsaboutthedefiningpropertiesofprobabilityismostaccurate?

A) ThesumoftheprobabilitiesofeventsE1thoughExequalsoneiftheevents
aremutuallyexclusiveorexhaustive.

B) Ifthedevicethatgeneratesaneventisnotfair,theeventscanbemutuallyexclusive
andexhaustive.

C) Theprobabilityofanyeventisbetween0and1,exclusive.

Explanation

Evenifthedevicethatgeneratesaneventisnotfair,theeventscanbemutuallyexclusiveandexhaustive.Considera
standarddiewiththepossibleoutcomesof1,2,3,4,5and6.TheP(2or4or6)=0.50andP(1or3or5)=0.50,andthusthe
probabilitiessumto1andaremutuallyexclusiveandexhaustive.Anunfairdiewouldnotchangethis.

Bothremainingstatementsarefalse.Theprobabilityofanyeventisbetween0and1,inclusive.Itispossiblethatthe
probabilityofaneventcouldequal0or1,oranypointinbetween.ThesumoftheprobabilitiesofeventsE1thoughExequals
1iftheeventsaremutuallyexclusiveandexhaustive.

Question#56of117 QuestionID:413079

IfXandYareindependentevents,whichofthefollowingismostaccurate?

A) P(X|Y)=P(X).

B) P(XorY)=(P(X))(P(Y)).
C) P(XorY)=P(X)+P(Y).

Explanation

Notethateventsbeingindependentmeansthattheyhavenoinfluenceoneachother.Itdoesnotnecessarilymeanthatthey
aremutuallyexclusive.Accordingly,P(XorY)=P(X)+P(Y)P(XandY).Bythedefinitionofindependentevents,P(X|Y)=
P(X).

Question#57of117 QuestionID:413042

Foragivencorporation,whichofthefollowingisanexampleofaconditionalprobability?Theprobabilitythecorporation's:

A) earningsincreaseanddividendincreases.

B) inventoryimproves.

C) dividendincreasesgivenitsearningsincrease.

Explanation

Aconditionalprobabilityinvolvestwoevents.Oneoftheeventsisagiven,andtheprobabilityoftheothereventdependsuponthatgiven.
Question#58of117 QuestionID:413072

Inagivenportfolio,halfofthestockshaveabetagreaterthanone.Ofthosewithabetagreaterthanone,athirdareina
computerrelatedbusiness.Whatistheprobabilityofarandomlydrawnstockfromtheportfoliohavingbothabetagreater
thanoneandbeinginacomputerrelatedbusiness?

A) 0.167.
B) 0.667.

C) 0.333.

Explanation

Thisisajointprobability.Fromtheinformation:P(beta>1)=0.500andP(comp.stock|beta>1)=0.333.Thus,thejoint
probabilityistheproductofthesetwoprobabilities:(0.500)(0.333)=0.167.

Question#59of117 QuestionID:434197

Aparkinglothas100redandbluecarsinit.

40%ofthecarsarered.
70%oftheredcarshaveradios.
80%ofthebluecarshaveradios.

Whatistheprobabilityofselectingacaratrandomthatiseitherredorhasaradio?

A) 28%.

B) 88%.

C) 76%.

Explanation

Theadditionruleforprobabilitiesisusedtodeterminetheprobabilityofatleastoneeventamongtwoormoreevents
occurring,inthiscaseacarbeingredorhavingaradio.Tousetheadditionrule,theprobabilitiesofeachindividualeventare
addedtogether,and,iftheeventsarenotmutuallyexclusive,thejointprobabilityofbotheventsoccurringatthesametimeis
subtractedout:P(redorradio)=P(red)+P(radio)P(redandradio)=0.40+0.760.28=0.88or88%.

Question#60of117 QuestionID:434198

Thereisa40%probabilitythattheeconomywillbegoodnextyearanda60%probabilitythatitwillbebad.Iftheeconomyis
good,thereisa50percentprobabilityofabullmarket,a30%probabilityofanormalmarket,anda20%probabilityofabear
market.Iftheeconomyisbad,thereisa20%probabilityofabullmarket,a30%probabilityofanormalmarket,anda50%
probabilityofabearmarket.Whatisthejointprobabilityofagoodeconomyandabullmarket?

A) 20%.

B) 12%.

C) 50%.
Explanation

Jointprobabilityistheprobabilitythatbothevents,inthiscasetheeconomybeinggoodandtheoccurrenceofabullmarket,
happenatthesametime.Jointprobabilityiscomputedbymultiplyingtheindividualeventprobabilitiestogether:0.400.50=
0.20or20%.

Question#61of117 QuestionID:413092

ThecovarianceofthereturnsoninvestmentsXandYis18.17.ThestandarddeviationofreturnsonXis7%,andthe
standarddeviationofreturnsonYis4%.WhatisthevalueofthecorrelationcoefficientforreturnsoninvestmentsXandY?

A) +0.85.

B) +0.65.

C) +0.32.

Explanation

Thecorrelationcoefficient=Cov(X,Y)/[(StdDev.X)(Std.Dev.Y)]=18.17/28=0.65

Question#62of117 QuestionID:413061

ThefollowingtablesummarizestheresultsofapolltakenofCEO'sandanalystsconcerningtheeconomicimpactofapending
pieceoflegislation:

Thinkitwillhavea Thinkitwillhavea
Group positiveimpact negativeimpact Total

CEO's 40 30 70

Analysts 70 60 130

110 90 200

Whatistheprobabilitythatarandomlyselectedindividualfromthisgroupwillbeeitherananalystorsomeonewhothinksthis
legislationwillhaveapositiveimpactontheeconomy?

A) 0.75.

B) 0.80.

C) 0.85.

Explanation

Thereare130totalanalystsand40CEOswhothinkitwillhaveapositiveimpact.(130+40)/200=0.85.

Question#63of117 QuestionID:413058

Iftwoeventsareindependent,theprobabilitythattheybothwilloccuris:
 A) Cannotbedeterminedfromtheinformationgiven.

B) 0.00.

C) 0.50.

Explanation

Iftwoeventsareindependent,theirprobabilityoftheirjointoccurrenceiscomputedasfollows:P(AB)=P(A)P(B).Sincewearenot
givenanyinformationontherespectiveprobabilitiesofAorB,thereisnotenoughinformation.

Question#64of117 QuestionID:413107

ForassetsAandBweknowthefollowing:E(RA)=0.10,E(RB)=0.20,Var(RA)=0.25,Var(RB)=0.36andthecorrelationof
thereturnsis0.6.Whatistheexpectedreturnofaportfoliothatisequallyinvestedinthetwoassets?

A) 0.1500.

B) 0.3050.

C) 0.2275.

Explanation

Theexpectedreturnofaportfoliocomposedofnassetsistheweightedaverageoftheexpectedreturnsoftheassetsinthe
portfolio:((w1)(E(R1))+((w2)(E(R2))=(0.50.1)+(0.50.2)=0.15.

Question#65of117 QuestionID:413029

WhichofthefollowingsetsofnumbersdoesNOTmeettherequirementsforasetofprobabilities?

A) (0.50,0.50).

B) (0.10,0.20,0.30,0.40,0.50).

C) (0.10,0.20,0.30,0.40).

Explanation

Asetofprobabilitiesmustsumtoone.

Question#66of117 QuestionID:413126

Ananalystexpectsthat20%ofallpubliclytradedcompanieswillexperienceadeclineinearningsnextyear.Theanalysthas
developedaratiotohelpforecastthisdecline.Ifthecompanyisheadedforadecline,thereisa90%chancethatthisratiowill
benegative.Ifthecompanyisnotheadedforadecline,thereisonlya10%chancethattheratiowillbenegative.Theanalyst
randomlyselectsacompanywithanegativeratio.BasedonBayes'theorem,theupdatedprobabilitythatthecompanywill
experienceadeclineis:

A) 69%.
B) 18%.
 C) 26%.

Explanation

Givenasetofpriorprobabilitiesforaneventofinterest,Bayes'formulaisusedtoupdatetheprobabilityoftheevent,inthis
casethatthecompanywehavealreadyselectedwillexperienceadeclineinearningsnextyear.Bayes'formulasaystodivide
theProbabilityofNewInformationgivenEventbytheUnconditionalProbabilityofNewInformationandmultiplythatresultby
thePriorProbabilityoftheEvent.Inthiscase,P(companyhavingadeclineinearningsnextyear)=0.20isdividedby0.26
(whichistheUnconditionalProbabilitythatacompanyhavinganearningsdeclinewillhaveanegativeratio(90%have
negativeratiosofthe20%whichhaveearningsdeclines)plus(10%havenegativeratiosofthe80%whichdonothave
earningsdeclines)or((0.90)(0.20))+((0.10)(0.80))=0.26.)ThisresultisthenmultipliedbythePriorProbabilityofthe
ratiobeingnegative,0.90.Theresultis(0.20/0.26)(0.90)=0.69or69%.

Question#67of117 QuestionID:413130

Whichofthefollowingstatementsaboutcountingmethodsisleastaccurate?

A) Thecombinationformuladeterminesthenumberofdifferentwaysagroupofobjects
canbedrawninaspecificorderfromalargersizedgroupofobjects.

B) Thelabelingformuladeterminesthenumberofdifferentwaystoassignagivennumberof
differentlabelstoasetofobjects.

C) Themultiplicationruleofcountingisusedtodeterminethenumberofdifferentwaysto
chooseoneobjectfromeachoftwoormoregroups.

Explanation

Thepermutationformulaisusedtofindthenumberofpossiblewaystodrawrobjectsfromasetofnobjectswhentheorderinwhichthe
objectsaredrawnmatters.Thecombinationformula("nchooser")isusedtofindthenumberofpossiblewaystodrawrobjectsfroma
setofnobjectswhenorderisnotimportant.Theotherstatementsareaccurate.

Question#68of117 QuestionID:413096

Whichofthefollowingstatementsisleastaccurateregardingcovariance?

A) Thecovarianceofavariablewithitselfisone.
B) Covariancecanonlyapplytotwovariablesatatime.

C) Covariancecanexceedone.

Explanation

Thecovarianceofavariablewithitselfisitsvariance.Bothremainingstatementsaretrue.Covariancerepresentsthelinear
relationshipbetweentwovariablesandisnotlimitedinvalue(i.e.,itcanrangefromnegativeinfinitytopositiveinfinity).

Question#69of117 QuestionID:413108
ComputethestandarddeviationofatwostockportfolioifstockA(40%weight)hasavarianceof0.0015,stockB(60%weight)
hasavarianceof0.0021,andthecorrelationcoefficientforthetwostocksis0.35?

A) 2.64%.

B) 0.07%.

C) 1.39%.

Explanation

Thestandarddeviationoftheportfolioisfoundby:

[W1212 +W2222+2W1W2121,2]0.5

=[(0.40)2(0.0015)+(0.60)2(0.0021)+(2)(0.40)(0.60)(0.0387)(0.0458)(0.35)]0.5

=0.0264,or2.64%.

Question#70of117 QuestionID:413068

IftheprobabilityofbothanewWalMartandanewWendy'sbeingbuiltnextmonthis68%andtheprobabilityofanewWal
Martbeingbuiltis85%,whatistheprobabilityofanewWendy'sbeingbuiltifanewWalMartisbuilt?

A) 0.70.

B) 0.80.

C) 0.60.

Explanation

P(AB)=P(A|B)P(B)

0.68/0.85=0.80

Question#71of117 QuestionID:413023

IfeventAandeventBcannotoccursimultaneously,theneventsAandBaresaidtobe:

A) mutuallyexclusive.

B) collectivelyexhaustive.

C) statisticallyindependent.

Explanation

Iftwoeventscannotoccurtogether,theeventsaremutuallyexclusive.Agoodexampleisacoinflip:headsANDtailscannotoccuron
thesameflip.

Question#72of117 QuestionID:413090

Thecorrelationcoefficientforaseriesofreturnsontwoinvestmentsisequalto0.80.Theircovarianceofreturnsis0.06974.
Whichofthefollowingarepossiblevariancesforthereturnsonthetwoinvestments?

A) 0.02and0.44.
B) 0.04and0.19.

C) 0.08and0.37.

Explanation

Thecorrelationcoefficientis:0.06974/[(StdDevA)(StdDevB)]=0.8.(StdDevA)(StdDevB)=0.08718.Sincethestandard
deviationisequaltothesquarerootofthevariance,eachpairofvariancescanbeconvertedtostandarddeviationsand
multipliedtoseeiftheyequal0.08718.0.04=0.20and0.19=0.43589.Theproductoftheseequals0.08718.

Question#73of117 QuestionID:413052

Ananalysthasalistof20bondsofwhich14arecallable,andfivehavewarrantsattachedtothem.Twoofthecallablebonds
havewarrantsattachedtothem.Ifasinglebondischosenatrandom,whatistheprobabilityofchoosingacallablebondora
bondwithawarrant?

A) 0.70.

B) 0.85.

C) 0.55.

Explanation

Thisrequirestheadditionformula,P(callable)+P(warrants)P(callableandwarrants)=P(callableorwarrants)=14/20+5/20
2/20=17/20=0.85.

Question#74of117 QuestionID:413057

Averylargecompanyhastwiceasmanymaleemployeesrelativetofemaleemployees.Ifarandomsampleoffour
employeesisselected,whatistheprobabilitythatallfouremployeesselectedarefemale?

A) 0.3333.

B) 0.0625.

C) 0.0123.

Explanation

Sincetherearetwiceasmanymaleemployeestofemaleemployees,P(male)=2/3andP(female)=1/3.Therefore,the
probabilityof4"successes"=(0.333)4=0.0123.

Question#75of117 QuestionID:413082

FirmAcanfallshort,meet,orexceeditsearningsforecast.Eachoftheseeventsisequallylikely.WhetherfirmAincreasesits
dividendwilldependupontheseoutcomes.Respectively,theprobabilitiesofadividendincreaseconditionalonthefirmfalling
short,meetingorexceedingtheforecastare20%,30%,and50%.Theunconditionalprobabilityofadividendincreaseis:

A) 1.000.

B) 0.333.

C) 0.500.

Explanation

Theunconditionalprobabilityistheweightedaverageoftheconditionalprobabilitieswheretheweightsaretheprobabilitiesof
theconditions.Inthisproblemthethreeconditionsfallshort,meet,orexceeditsearningsforecastareallequallylikely.
Therefore,theunconditionalprobabilityisthesimpleaverageofthethreeconditionalprobabilities:(0.2+0.3+0.5)3.

Question#76of117 QuestionID:413028

Theprobabilitiesofearningaspecifiedreturnfromaportfolioareshownbelow:

Probability Return

0.20 10%

0.20 20%

0.20 22%

0.20 15%

0.20 25%

Whataretheoddsofearningatleast20%?

A) Threetotwo.

B) Twotothree.

C) Threetofive.

Explanation

Oddsarethenumberofsuccessfulpossibilitiestothenumberofunsuccessfulpossibilities:

P(E)/[1P(E)]or0.6/0.4or3/2.

Question#77of117 QuestionID:413095

ThereturnsonassetsCandDarestronglycorrelatedwithacorrelationcoefficientof0.80.ThevarianceofreturnsonCis0.0009,and
thevarianceofreturnsonDis0.0036.WhatisthecovarianceofreturnsonCandD?

A) 0.03020.

B) 0.00144.

C) 0.40110.
Explanation

r=Cov(C,D)/(CxD)
C=(0.0009)0.5=0.03
D=(0.0036)0.5=0.06
0.8(0.03)(0.06)=0.00144

Question#78of117 QuestionID:413084

Aconditionalexpectationinvolves:

A) determiningtheexpectedjointprobability.

B) calculatingtheconditionalvariance.

C) refiningaforecastbecauseoftheoccurrenceofsomeotherevent.

Explanation

Conditionalexpectedvaluesarecontingentupontheoccurrenceofsomeotherevent.Theexpectationchangesasnew
informationisrevealed.

Question#79of117 QuestionID:413097

GivenCov(X,Y)=1,000,000.WhatdoesthisindicateabouttherelationshipbetweenXandY?

A) Onlythatitispositive.

B) Itisweakandpositive.

C) Itisstrongandpositive.

Explanation

Apositivecovarianceindicatesapositivelinearrelationshipbutnothingelse.Themagnitudeofthecovariancebyitselfisnot
informativewithrespecttothestrengthoftherelationship.

Question#80of117 QuestionID:413106

Atwosidedbutverythickcoinisexpectedtolandonitsedgetwiceoutofevery100flips.Andtheprobabilityoffaceup
(heads)andtheprobabilityoffacedown(tails)areequal.Whenthecoinisflipped,theprizeis$1forheads,$2fortails,and
$50whenthecoinlandsonitsedge.Whatistheexpectedvalueoftheprizeonasinglecointoss?

A) $1.50.

B) $17.67.

C) $2.47.

Explanation

Sincetheprobabilityofthecoinlandingonitsedgeis0.02,theprobabilityofeachoftheothertwoeventsis0.49.The
expectedpayoffis:(0.02$50)+(0.49$1)+(0.49$2)=$2.47.

Question#81of117 QuestionID:413119

Thejointprobabilityfunctionforreturnsonanequityindex(RI)andreturnsonastock(RS)isgiveninthefollowingtable:

ReturnsonIndex(RI)

Returnonstock
RI=0.16 RI=0.02 RI=0.10
(RS)

RS=0.24 0.25 0.00 0.00

RS=0.03 0.00 0.45 0.00

RS=0.15 0.00 0.00 0.30

Covariancebetweenstockreturnsandindexreturnsisclosestto:

A) 0.029.

B) 0.019.
C) 0.014.

Explanation

E(I)=(0.250.16)+(0.450.02)+(0.300.10)=0.0190.
E(S)=(0.250.24)+(0.450.03)+(0.300.15)=0.0285.

Covariance=[0.25(0.160.0190)(0.240.0285)]+[0.45(0.020.0190)(0.030.0285)]+[0.30(0.100.0190)
(0.150.0285)]=0.0138.

Question#82of117 QuestionID:413105

ThefollowinginformationisavailableconcerningexpectedreturnandstandarddeviationofPlutoandNeptuneCorporations:

ExpectedReturn StandardDeviation

PlutoCorporation 11% 0.22

NeptuneCorporation 9% 0.13

IfthecorrelationbetweenPlutoandNeptuneis0.25,determinetheexpectedreturnandstandarddeviationofaportfoliothat
consistsof65%PlutoCorporationstockand35%NeptuneCorporationstock.

A) 10.3%expectedreturnand2.58%standarddeviation.

B) 10.0%expectedreturnand16.05%standarddeviation.

C) 10.3%expectedreturnand16.05%standarddeviation.

Explanation

ERPort =(WPluto)(ERPluto)+(WNeptune)(ERNeptune)
 =(0.65)(0.11)+(0.35)(0.09)=10.3%

p =[(w1)2(1)2+(w2)2(2)2+2w1w212r1,2]1/2

=[(0.65)2(22)2+(0.35)2(13)2+2(0.65)(0.35)(22)(13)(0.25)]1/2

=[(0.4225)(484)+(0.1225)(169)+2(0.65)(0.35)(22)(13)(0.25)]1/2

=(257.725)1/2=16.0538%

Question#83of117 QuestionID:413104

Assumetwostocksareperfectlynegativelycorrelated.StockAhasastandarddeviationof10.2%andstockBhasastandard
deviationof13.9%.Whatisthestandarddeviationoftheportfolioif75%isinvestedinAand25%inB?

A) 0.17%.

B) 4.18%.

C) 0.00%.

Explanation

Thestandarddeviationoftheportfolioisfoundby:

[W1212 +W2222 +2W1W212r1,2]0.5,or[(0.75)2(0.102)2 +(0.25)2(0.139)2 +(2)(0.75)(0.25)(0.102)(0.139)(1.0)]0.5=0.0418,

or4.18%.

Question#84of117 QuestionID:413089

Thereisa60%chancethattheeconomywillbegoodnextyearanda40%chancethatitwillbebad.Iftheeconomyisgood,
thereisa70%chancethatXYZIncorporatedwillhaveEPSof$5.00anda30%chancethattheirearningswillbe$3.50.Ifthe
economyisbad,thereisan80%chancethatXYZIncorporatedwillhaveEPSof$1.50anda20%chancethattheirearnings
willbe$1.00.Whatisthefirm'sexpectedEPS?

A) $5.95.

B) $2.75.
C) $3.29.

Explanation

TheexpectedEPSiscalculatedbymultiplyingtheprobabilityoftheeconomicenvironmentbytheprobabilityoftheparticular
EPSandtheEPSineachcase.TheexpectedEPSinallfouroutcomesarethensummedtoarriveattheexpectedEPS:

(0.600.70$5.00)+(0.600.30$3.50)+(0.400.80$1.50)+(0.400.20$1.00)=$2.10+$0.63+$0.48+
$0.08=$3.29.

Question#85of117 QuestionID:413053
JessicaFassler,optionstrader,recentlywrotetwoputoptionsontwodifferentunderlyingstocks(AlphaDogSoftwareand
OmegaWolfPublishing),bothwithastrikepriceof$11.50.TheprobabilitiesthatthepricesofAlphaDogandOmegaWolfstock
willdeclinebelowthestrikepriceare65%and47%,respectively.Theprobabilitythatatleastoneoftheputoptionswillfall
belowthestrikepriceisapproximately:

A) 1.00.

B) 0.31.

C) 0.81.

Explanation

Wecalculatetheprobabilitythatatleastoneoftheoptionswillfallbelowthestrikepriceusingtheadditionruleforprobabilities
(ArepresentsAlphaDog,OrepresentsOmegaWolf):

P(AorO)=P(A)+P(O)P(AandO),whereP(AandO)=P(A)P(O)
P(AorO)=0.65+0.47(0.650.47)=approximately0.81

Question#86of117 QuestionID:413049

Iftwofaircoinsareflippedandtwofairsixsideddicearerolled,allatthesametime,whatistheprobabilityofendingupwith
twoheads(onthecoins)andtwosixes(onthedice)?

A) 0.4167.

B) 0.8333.

C) 0.0069.

Explanation

Forthefourindependenteventsdefinedhere,theprobabilityofthespecifiedoutcomeis0.50000.50000.16670.1667=
0.0069.

Question#87of117 QuestionID:413091

Thecovarianceofreturnsontwoinvestmentsovera10yearperiodis0.009.IfthevarianceofreturnsforinvestmentAis
0.020andthevarianceofreturnsforinvestmentBis0.033,whatisthecorrelationcoefficientforthereturns?

A) 0.687.

B) 0.444.

C) 0.350.

Explanation

Thecorrelationcoefficientis:Cov(A,B)/[(StdDevA)(StdDevB)]=0.009/[(0.02)(0.033)]=0.350.

Question#88of117 QuestionID:413069
Thefollowingtablesummarizestheavailabilityoftruckswithairbagsandbucketseatsatadealership.

Bucket NoBucket
Total
seats Seats
AirBags 75 50 125
NoAirBags 35 60 95
Total 110 110 220

Whatistheprobabilityofrandomlyselectingatruckwithairbagsandbucketseats?

A) 0.34.

B) 0.16.

C) 0.28.

Explanation

75220=0.34.

Question#89of117 QuestionID:413051

Averylargecompanyhasequalamountsofmaleandfemaleemployees.Ifarandomsampleoffouremployeesisselected,whatisthe
probabilitythatallfouremployeesselectedarefemale?

A) 0.0625.

B) 0.0256

C) 0.1600

Explanation

Eachemployeehasequalchanceofbeingmaleorfemale.Hence,probabilityof4"successes"=(0.5)4=0.0625

Question#90of117 QuestionID:413109

GivenP(X=2)=0.3,P(X=3)=0.4,P(X=4)=0.3.WhatisthevarianceofX?

A) 3.0.
B) 0.3.

C) 0.6.

Explanation

Thevarianceisthesumofthesquareddeviationsfromtheexpectedvalueweightedbytheprobabilityofeachoutcome.
TheexpectedvalueisE(X)=0.32+0.43+0.34=3.
Thevarianceis0.3(23)2+0.4(33)2+0.3(43)2=0.6.
Question#91of117 QuestionID:413043

LetAandBbetwomutuallyexclusiveeventswithP(A)=0.40andP(B)=0.20.Therefore:

A) P(AandB)=0.
B) P(AandB)=0.08.

C) P(B|A)=0.20.

Explanation

Ifthetwoevensaremutuallyexclusive,theprobabilityofbothocurringiszero.

Question#92of117 QuestionID:413083

TheeventsYandZaremutuallyexclusiveandexhaustive:P(Y)=0.4andP(Z)=0.6.IftheprobabilityofXgivenYis0.9,and
theprobabilityofXgivenZis0.1,whatistheunconditionalprobabilityofX?

A) 0.42.

B) 0.33.

C) 0.40.

Explanation

Becausetheeventsaremutuallyexclusiveandexhaustive,theunconditionalprobabilityisobtainedbytakingthesumofthe
twojointprobabilities:P(X)=P(X|Y)P(Y)+P(X|Z)P(Z)=0.40.9+0.60.1=0.42.

Question#93of117 QuestionID:413071

Datashowsthat75outof100touristswhovisitNewYorkCityvisittheEmpireStateBuilding.ItrainsorsnowsinNewYork
Cityonedayinfive.WhatisthejointprobabilitythatarandomlychoosentouristvisitstheEmpireStateBuildingonadaywhen
itneitherrainsnorsnows?

A) 60%.

B) 15%.
C) 95%.

Explanation

Ajointprobabilityistheprobabilitythattwoeventsoccurwhenneitheriscertainoragiven.Jointprobabilityiscalculatedby
multiplyingtheprobabilityofeacheventtogether.(0.75)(0.80)=0.60or60%.

Question#94of117 QuestionID:434200

TinaO'Fahey,CFA,believesastock'spriceinthenextquarterdependsontwofactors:thedirectionoftheoverallmarketand
whetherthecompany'snextearningsreportisgoodorpoor.Thepossibleoutcomesandsomeprobabilitiesareillustratedin
thetreediagramshownbelow:
Basedonthistreediagram,theexpectedvalueofthestockifthemarketdecreasesisclosestto:

A) $57.00.

B) $62.50.

C) $26.00.

Explanation

Theexpectedvalueiftheoverallmarketdecreasesis0.4($60)+(10.4)($55)=$57.

Question#95of117 QuestionID:413131

Forthetaskofarrangingagivennumberofitemswithoutanysubgroups,thiswouldrequire:

A) thelabelingformula.

B) onlythefactorialfunction.
C) thepermutationformula.

Explanation

Thefactorialfunction,denotedn!,tellshowmanydifferentwaysnitemscanbearrangedwherealltheitemsareincluded.

Question#96of117 QuestionID:413088

Thereisan80%chancethattheeconomywillbegoodnextyearanda20%chancethatitwillbebad.Iftheeconomyisgood,
thereisa60%chancethatXYZIncorporatedwillhaveEPSof$3.00anda40%chancethattheirearningswillbe$2.50.Ifthe
economyisbad,thereisa70%chancethatXYZIncorporatedwillhaveEPSof$1.50anda30%chancethattheirearnings
willbe$1.00.Whatisthefirm'sexpectedEPS?

A) $2.51.

B) $2.00.

C) $4.16.

Explanation

TheexpectedEPSiscalculatedbymultiplyingtheprobabilityoftheeconomicenvironmentbytheprobabilityoftheparticular
EPSandtheEPSineachcase.TheexpectedEPSinallfouroutcomesarethensummedtoarriveattheexpectedEPS:
 (0.800.60$3.00)+(0.800.40$2.50)+(0.200.70$1.50)+(0.200.30$1.00)=$1.44+$0.80+$0.21+
$0.06=$2.51.

Question#97of117 QuestionID:413059

Thereisa30%probabilityofrainthisafternoon.Thereisa10%probabilityofhavinganumbrellaifitrains.Whatisthechance
ofitrainingandhavinganumbrella?

A) 40%.

B) 33%.

C) 3%.

Explanation

P(A)=0.30.P(B|A)=0.10.P(AB)=(0.30)(0.10)=0.03or3%.

Question#98of117 QuestionID:413040

The"likelihood"ofaneventoccurringreferstoa:

A) jointprobability.

B) unconditionalprobability.

C) conditionalprobability.

Explanation

Conditionalprobability,orlikelihood,iswheretheoccurrenceofoneeventaffectstheprobabilityoftheoccurrenceofanother
event.Anunconditionalprobabilityreferstotheprobabilityofaneventoccurringregardlessofpastoffutureevents.Ajoint
probabilityistheprobabilitythattwoeventswillbothoccur.

Question#99of117 QuestionID:413063

Thefollowingtablesummarizestheavailabilityoftruckswithairbagsandbucketseatsatadealership.
BucketSeats NoBucketSeats Total
AirBags 75 50 125
NoAirBags 35 60 95
Total 110 110 220

Whatistheprobabilityofselectingatruckatrandomthathaseitherairbagsorbucketseats?

A) 73%.

B) 107%.

C) 34%.

Explanation
Theadditionruleforprobabilitiesisusedtodeterminetheprobabilityofatleastoneeventamongtwoormoreevents
occurring.Theprobabilityofeacheventisaddedandthejointprobability(iftheeventsarenotmutuallyexclusive)is
subtractedtoarriveatthesolution.P(airbagsorbucketseats)=P(airbags)+P(bucketseats)P(airbagsandbucketseats)
=(125/220)+(110/220)(75/220)=0.57+0.500.34=0.73or73%.

Alternative:1P(noairbagandnobucketseats)=1(60/220)=72.7%

Question#100of117 QuestionID:413076

Theprobabilityofrollinga3onthefourthrollofafair6sideddie:

A) isequaltotheprobabilityofrollinga3onthefirstroll.

B) is1/6tothefourthpower.

C) dependsontheresultsofthethreepreviousrolls.

Explanation

Becauseeacheventisindependent,theprobabilitydoesnotchangeforeachroll.Forasixsideddietheprobabilityofrollinga
3(oranyothernumberfrom1to6)onasinglerollis1/6.

Question#101of117 QuestionID:413046

Theunconditionalprobabilityofanevent,givenconditionalprobabilities,isdeterminedbyusingthe:

A) totalprobabilityrule.

B) multiplicationruleofprobability.

C) additionruleofprobability.

Explanation

Thetotalprobabilityruleususedtocalculatetheunconditionalprobabilityofaneventfromtheconditionalprobabilitiesofthe
eventgivenamutuallyexclusiveandexhaustivesetofoutcomes.Theruleisexpressedas:

P(A)=P(A|B1)P(B1)+P(A|B2)P(B2)+...+P(A|Bn)P(Bn)

Question#102of117 QuestionID:413078

Acompanysaysthatwhetheritincreasesitsdividendsdependsonwhetheritsearningsincrease.Fromthisweknow:

A) P(bothdividendincreaseandearningsincrease)=P(dividendincrease).

B) P(dividendincrease|earningsincrease)isnotequaltoP(earningsincrease).

C) P(earningsincrease|dividendincrease)isnotequaltoP(earningsincrease).

Explanation

IftwoeventsAandBaredependent,thentheconditionalprobabilitiesofP(A|B)andP(B|A)willnotequaltheirrespective
unconditionalprobabilities(ofP(A)andP(B),respectively).Bothremainingchoicesmayormaynotoccur,e.g.,P(A|B)=P(B)
ispossiblebutnotnecessary.

Question#103of117 QuestionID:434196

Aparkinglothas100redandbluecarsinit.

40%ofthecarsarered.
70%oftheredcarshaveradios.
80%ofthebluecarshaveradios.

Whatistheprobabilityofselectingacaratrandomandhavingitberedandhavearadio?

A) 48%.

B) 28%.
C) 25%.

Explanation

Jointprobabilityistheprobabilitythatbothevents,inthiscaseacarbeingredandhavingaradio,happenatthesametime.
Jointprobabilityiscomputedbymultiplyingtheindividualeventprobabilitiestogether:P(redandradio)=(P(red))(P(radio))=
(0.4)(0.7)=0.28or28%.

Radio NoRadio
Red 28 12 40
Blue 48 12 60
76 24 100

Question#104of117 QuestionID:413056

Giventhefollowingtableaboutemployeesofacompanybasedonwhethertheyaresmokersornonsmokersandwhetheror
nottheysufferfromanyallergies,whatistheprobabilityofbeingeitheranonsmokerornotsufferingfromallergies?

SufferfromAllergies Don'tSufferfromAllergies Total

Smoker 35 25 60
Nonsmoker 55 185 240
Total 90 210 300

A) 0.50.

B) 0.88.

C) 0.38.

Explanation

Theprobabilityofbeinganonsmokeris240/300=0.80.Theprobabilityofnotsufferingfromallergiesis210/300=0.70.
Theprobabilityofbeinganonsmokerandnotsufferingfromallergiesis185/300=0.62.Sincethequestionasksforthe
probabilityofbeingeitheranonsmokerornotsufferingfromallergieswehavetotaketheprobabilityofbeinganonsmoker
plustheprobabilityofnotsufferingfromallergiesandsubtracttheprobabilityofbeingboth:0.80+0.700.62=0.88.

Alternatively:1P(Smoker&Allergies)=1(35/300)=88.3%.

Question#105of117 QuestionID:413080

JayHamilton,CFA,isanalyzingMadison,Inc.,adistressedfirm.Hamiltonbelievesthefirm'ssurvivaloverthenextyear
dependsonthestateoftheeconomy.Hamiltonassignsprobabilitiestofoureconomicgrowthscenariosandestimatesthe
probabilityofbankruptcyforMadisonundereach:

Probabilityof Probabilityof
Economicgrowthscenario
scenario bankruptcy

Recession(<0%) 20% 60%

Slowgrowth(0%to2%) 30% 40%

Normalgrowth(2%to4%) 40% 20%

Rapidgrowth(>4%) 10% 10%

BasedonHamilton'sestimates,theprobabilitythatMadison,Inc.doesnotgobankruptinthenextyearisclosestto:

A) 18%.

B) 67%.

C) 33%.

Explanation

Usingthetotalprobabilityrule,theunconditionalprobabilityofbankruptcyis(0.2)(0.6)+(0.3)(0.4)+(0.4)(0.2)+(0.1)(0.1)=
0.33.TheprobabilitythatMadison,Inc.doesnotgobankruptis10.33=0.67=67%.

Question#106of117 QuestionID:413022

Inanygivenyear,thechanceofagoodyearis40%,anaverageyearis35%,andthechanceofabadyearis25%.Whatis
theprobabilityofhavingtwogoodyearsinarow?

A) 8.75%.

B) 10.00%.

C) 16.00%.

Explanation

Thejointprobabilityofindependenteventsisobtainedbymultiplyingtheprobabilitiesoftheindividualeventstogether:(0.40)
(0.40)=0.16or16%.

Question#107of117 QuestionID:413038
Atacharityfundraisertherehavebeenatotalof342raffleticketsalreadysold.Ifapersonthenpurchasestwoticketsrather
thanone,howmuchmorelikelyaretheytowin?

A) 1.99.

B) 0.50.

C) 2.10.

Explanation

Ifyoupurchaseoneticket,theprobabilityofyourticketbeingdrawnis1/343or0.00292.Ifyoupurchasetwotickets,your
probabilitybecomes2/344or0.00581,soyouare0.00581/0.00292=1.99timesmorelikelytowin.

Question#108of117 QuestionID:413035

Iftheoddsagainstaneventoccurringaretwelvetoone,whatistheprobabilitythatitwilloccur?

A) 0.0833.

B) 0.9231.

C) 0.0769.

Explanation

Iftheprobabilityagainsttheeventoccurringistwelvetoone,thismeansthatinthirteenoccurrencesoftheevent,itis
expectedthatitwilloccuronceandnotoccurtwelvetimes.Theprobabilitythattheeventwilloccuristhen:1/13=0.0769.

Question#109of117 QuestionID:434195

HelenPedersenhasallhermoneyinvestedineitheroftwomutualfunds(AandB).Sheknowsthatthereisa40%probability
thatfundAwillriseinpriceanda60%chancethatfundBwillriseinpriceiffundArisesinprice.Whatistheprobabilitythat
bothfundAandfundBwillriseinprice?

A) 0.40.

B) 0.24.

C) 1.00.

Explanation

P(A)=0.40,P(B|A)=0.60.Therefore,P(AB)=P(A)P(B|A)=0.40(0.60)=0.24.

Question#110of117 QuestionID:413128

Afirmwantstoselectateamoffivefromagroupoftenemployees.Howmanywayscanthefirmcomposetheteamoffive?

A) 252.

B) 25.
 C) 120.

Explanation

Thisisalabelingproblemwherethereareonlytwolabels:chosenandnotchosen.Thus,thecombinationformulaapplies:10!
/(5!5!)=3,628,800/(120120)=252.

WithaTIcalculator:10[2nd][nCr]5=252.

Question#111of117 QuestionID:413116

Usethefollowingprobabilitydistributiontocalculatetheexpectedreturnfortheportfolio.

StateoftheEconomy Probability ReturnonPortfolio

Boom 0.30 15%

Bust 0.70 3%

A) 6.6%.

B) 9.0%.

C) 8.1%.

Explanation

0.300.15+0.700.03=6.6%

Question#112of117 QuestionID:413024

Whichofthefollowingstatementsaboutprobabilityismostaccurate?

A) Anoutcomeisthecalculatedprobabilityofanevent.
B) Aneventisasetofoneormorepossiblevaluesofarandomvariable.

C) Aconditionalprobabilityistheprobabilitythattwoormoreeventswillhappen
concurrently.

Explanation

Conditionalprobabilityistheprobabilityofoneeventhappeninggiventhatanothereventhashappened.Anoutcomeisthe
numericalresultassociatedwitharandomvariable.

Question#113of117 QuestionID:413093

Ifgiventhestandarddeviationsofthereturnsoftwoassetsandthecorrelationbetweenthetwoassets,whichofthefollowing
wouldananalystleastlikelybeabletoderivefromthese?
 A) Strengthofthelinearrelationshipbetweenthetwo.
B) Covariancebetweenthereturns.

C) Expectedreturns.

Explanation

Thecorrelationsandstandarddeviationscannotgiveameasureofcentraltendency,suchastheexpectedvalue.

Question#114of117 QuestionID:413098

PersonalAdvisers,Inc.,hasdeterminedfourpossibleeconomicscenariosandhasprojectedtheportfolioreturnsfortwo
portfoliosfortheirclientundereachscenario.Personal'seconomisthasestimatedtheprobabilityofeachscenarioasshownin
thetablebelow.Giventhisinformation,whatisthecovarianceofthereturnsonPortfolioAandPortfolioB?

Scenario Probability ReturnonPortfolio ReturnonPortfolioB

A
A 15% 18% 19%
B 20% 17% 18%
C 25% 11% 10%
D 40% 7% 9%

A) 0.001898.

B) 0.002019.

C) 0.890223.

Explanation

S P(S) ReturnonPortfolioA RAE(RA) ReturnonPortfolioB RBE(RB) [RAE(RA)]

x[RBE(RB)]
xP(S)

A 15% 18% 6.35% 19% 6.45% 0.000614

B 20% 17% 5.35% 18% 5.45% 0.000583

C 25% 11% 0.65% 10% 2.55% 0.000041

D 40% 7% 4.65% 9% 3.55% 0.000660

E(RA)=11.65% E(RB)=12.55% Cov(RA,RB)=0.001898

Question#115of117 QuestionID:434202

Aparkinglothas100redandbluecarsinit.

40%ofthecarsarered.
 70%oftheredcarshaveradios.
80%ofthebluecarshaveradios.

Whatistheprobabilitythatthecarisredgiventhatithasaradio?

A) 28%.

B) 47%.
C) 37%.

Explanation

Givenasetofpriorprobabilitiesforaneventofinterest,Bayes'formulaisusedtoupdatetheprobabilityoftheevent,inthis
casethatthecarwealreadyknowhasaradioisred.Bayes'formulasaystodividetheProbabilityofNewInformationgiven
EventbytheUnconditionalProbabilityofNewInformationandmultiplythatresultbythePriorProbabilityoftheEvent.Inthis
case,P(redcarhasaradio)=0.70isdividedby0.76(whichistheUnconditionalProbabilityofacarhavingaradio(40%are
redofwhich70%haveradios)plus(60%areblueofwhich80%haveradios)or((0.40)(0.70))+((0.60)(0.80))=0.76.)
ThisresultisthenmultipliedbythePriorProbabilityofacarbeingred,0.40.Theresultis(0.70/0.76)(0.40)=0.37or37%.

Question#116of117 QuestionID:413120

GivenP(X=2,Y=10)=0.3,P(X=6,Y=2.5)=0.4,andP(X=10,Y=0)=0.3,thenCOV(XY)is:

A) 12.0.

B) 24.0.
C) 6.0.

Explanation

Theexpectedvaluesare:E(X)=(0.32)+(0.46)+(0.310)=6andE(Y)=(0.310.0)+(0.42.5)+(0.30.0)=4.
ThecovarianceisCOV(XY)=((0.3((26)(104)))+((0.4((66)(2.54)))+(0.3((106)(04)))=12.

Question#117of117 QuestionID:434203

Asupervisorisevaluatingtensubordinatesfortheirannualperformancereviews.Accordingtoanewcorporatepolicy,for
everytenemployees,twomustbeevaluatedas"exceedsexpectations,"sevenas"meetsexpectations,"andoneas"doesnot
meetexpectations."Howmanydifferentwaysisitpossibleforthesupervisortoassigntheseratings?

A) 360.
B) 10,080.

C) 5,040.

Explanation

Thenumberofdifferentwaystoassigntheselabelsis: