Page 12 - FINAL CFA I SLIDES JUNE 2019 DAY 3
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Session Unit 2:
9. Probability Concepts
LOS 9.h:
Calculate and interpret an unconditional probability using the total probability rule, p177
Recall he total probability rule, p172, is for UCP of an event, given CPs:
P(A) = P(A | B1)P(B1) + P(A | B2)P(B2) + … + P(A | BN)P(BN)
…….where B1, B2,…BN is a mutually exclusive and exhaustive set of outcomes.
Or, In general, the unconditional probability of event R,
P(R) = P(R | S1) × P(S1) + P(R | S2) × P(S2) + . . . + P(R | SN) × P(SN), where the set of events {S1, S2, . . .
SN} is mutually exclusive and exhaustive.
The total probability rule highlights the relationship between unconditional and conditional probabilities of
mutually exclusive and exhaustive events.
It is used to explain the unconditional probability of an event in terms of probabilities that are
conditional upon other events.
