Level I CFA Quant: Probability Concepts-Lecture 2

This is Reading 8 for the 2021 exam.
This CFA exam prep video lecture covers:
Independent and dependent events
The total probability rule
Expected value of a random variable
Variance of a random variable
Total probability rule for expected value
Practice questions
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[@IFT-CFA]

How much practice do I need to do? The Magic Number of questions to do to Pass Level I exam is…...read on here: ift.world/the-magic-number/

[@prathameshpandit4705]

At 11:02 the probabilities (that must sum to 1 or 100) if they aren't known, how do I calculate it for the scenarios(in this case the the cash flows for a particular state of economy)

[@Ytremz]

I believe there is an error in the conditional probability tree question... it states that there is a 75% chance that the stock price will be 70, when it should be 50%, if I'm not mistaken.

[@IFT-CFA]

Dear tremz, In the last example in this video the, the probability that the stock price will be 70 (given that the interest rates don't decrease) is 50%(0.5) which is also rightly explained in the video as well. IFT Support Team

[@priyanknahata9076]

no, what he meant was that there's a typing error in the question in the last line, where it should mention 50% instead of 75%.

[@priyanknahata9076]

the error is just above the probability tree diagram

[@mohdmohtashim9841]

Question states that there is a 75 percent probability of the price at 70, while the calculation has been done on 50 percent probability of the price at 70,which brings the answer to 75. This is what @Ytremz is trying to point out.

[@amiradam18]

At 22:10 , what is the relevance of knowing probability under the price i.e., Probability of $100 is 0.3, Probability of $90 is 0.1

[@abdullaalturabi6526]

20:48 .. in the question it says the probability of SP = $80 is 50% but probability of SP = $70 is 75%??? do u mean the latter is 50% and it's a typo or?

[@IFT-CFA]

yes you are correct. It should rather say the following:If interest rates do not decline there is a 50% chance that the stock price will be 80 versus a 50% chance that stock price will be 70.Thanks for your feedback. IFT Support Team

[@shubham2637]

thanks for the comment here as i was having the same question.

[@mehulmistry7637]

Hello Sir, At 17:33 I have entered all the inputs correctly, I'm still getting N = 0 which furthers show error 1. What could be possible solution for this?

[@IFT-CFA]

If you are not getting N = 100 then you must be making data entry error. Please enter the value again by following the steps in the video. IFT Support Team

[@mubarakalkendi7248]

Must we use the calculated or can we just use the formulas or in my case use your common sense approach to solve for variance ? 16:10

[@IFT-CFA]

it depends. Given the date, you may use the calculator to save time. IFT Support Team

[@omlabde3014]

In the last example of probability tree. During no interest rate period the probability that stock price will be 70 is 75 percent as per the question. Why have you written .50 for that. I see no reason to that. PLEASE EXPLAIN 🙏

[@usmanzahid3711]

Sir there's a confusion In case of unconditional probability Addition rule is applied And in case of conditional probability Primarily multiplication rule is applied? Am I correct?

[@monifuntastic]

best video .. thankyou

[@IFT-CFA]

Thanks for your kind words. IFT Support Team

[@panachaiinthakul4172]

Sir at 6.37 why P(A or B) = P(A)+P(B) ? Isn't it supposed to be P(A or B) = P(A)+P(B) - P(AB) ? Thank you

[@IFT-CFA]

Because in this case, the events are mutually exclusive. When events are mutually exclusive, P (AB) is 0. IFT support team

[@abdullaalturabi6526]

i just have a question about variance of random variable: why don't we divide it by n? in population variance we do the same squared deviation from mean BUT then divide it by n. why isn't it the same here? is it because we're not dealing with a n amount of population? thanks in advance!

[@IFT-CFA]

We are here dealing with variance of random variable, which is the Expected value of squared deviations from the random variable’s expected value. Expected value is the probability weighted average. The expected value is our forecast, but we cannot count on the individual forecast being realized. This is why we need to measure the risk we face. Variance and standard deviation are examples of how we can measure this risk. The variance of a random variable is the probability-weighted sum of the squared differences between each possible outcome and the expected value of the random variable. IFT Support Team

[@craigdoyle5036]

Hi sir, I am attempting to compute std dev and variance using hp 12c. I am getting a variance of 33.33 and a std dev of 15.27. Please could you help - I have tried other youtube videos, HP guide for std dev and Schwesters hp 12c guide. Thank you in advance, Craig

[@IFT-CFA]

please share your calculation steps so that we can see where is the issue. IFT Support Team

[@craigdoyle5036]

@@IFT-CFA thank you for your response. I have a similar example that I have just been trying to do within the curriculum:

[@mosw8288]

Thank you for your efforts and the videos, BTW I tried to ""download the mentioned materials"" in the previous videos and I couldn't neither chrome nor the explorer ?!!

[@IFT-CFA]

Please send more details at [e-mail] IFT Support Team

[@rolandorivera2401]

In the last example of the stock price. The probabilities of 0.30,0.10,0.30 we dont do nothing with that?

[@shubham2637]

Yes, we can do calclulate the Expected Stock Price with that as Submission(Price* Prob) (0.3*100)+(0.1*90)+(0.3*80)+(0.3*70) =30+9+24+21 =84 which is same as calculated from the formula of E(X)

[@abdulmalekm8265]

Brother this video differs than the one in App, Why?

[@usmanzahid3711]

P(/b) =p(a) Sir please elaborate a little more

[@aatishirani]

i am trying my best to learn understood all other chapters well , im not understanding probability despite watching it twice

[@IFT-CFA]

Please read the strategy advise on this link: ift.freshdesk.com/support/solutions/articles/13000038848-the-ift-10-step-strategy-to-pass-the-level-i-cfa-exam IFt support team