Page 56 - FINAL CFA SLIDES DECEMBER 2018 DAY 3
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LOS 9.n: Calculate and interpret an Session Unit 2:
updated probability using Bayes’ 9. Probability Concepts
formula, p.191/193
Example: Bayes’ formula (2): There is a 60% probability the economy will outperform, and if it does, there is a 70%
chance a stock will go up and a 30% chance the stock will go down. There is a 40% chance the economy will
underperform, and if it does, there is a 20% chance the stock in question will increase in value (have gains) and an 80%
chance it will not. Let’s diagram this situation.
In the previous notation, we have:
• p of economic outperformance = P(O) = 60%,
• p of stock gains given economic outperformance: P(G|O) = 70%,
• (unconditional) probability of a gain in stock price is 50%.
Per BF, we are seeking P(O | G), the probability of
outperformance given gains:
