Page 13 - 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, p.177
Example: An investment application of unconditional probability: Assuming that a recession can only
occur with either of the two events—interest rates increase (I) or interest rates do not increase (IC)—since
these events are mutually exclusive and exhaustive;
Logically therefore, the sum of the two JPs must be the UCP of recession: P(R) = P(R I) + P(R IC)
Assume that P(R | I) = 0.70, P(R | IC), the probability of recession if interest rates do not rise, is 10% and that
P(I) = 0.40 so that P(IC) = 1- P(I) = 0.60.
How do you read this?
