Page 11 - FINAL CFA I SLIDES JUNE 2019 DAY 3

Session Unit 2:

9. Probability Concepts
LOS 9.g:
Distinguish between dependent and independent events, p. 176

For Independent events the occurrence of one has no influence on the occurrence of the others, e.g. if:
P(A | B) = P(A), or equivalently, P(B | A) = P(B)

Otherwise, the events are dependent events. In our Interest rate (I) and Recession (.R) example, the
occurrence of I affects the p. of the occurrence of R.

Dependence: P(R) = 0.34, but P(R | I) = 0.7; the probability of a recession is greater
when there is an increase in interest rates.

Independence: Event of rolling a 4 on the second toss is independent of 4 on the first toss.
P(4 on second toss | 4 on first toss) = P(4 on second toss) = 1/6 or 0.167

The idea of independent events also applies to flips of a coin:
P(heads on first coin | heads on second coin) = P(heads on first coin) = 1/2 or 0.50