Page 17 - FINAL CFA I SLIDES JUNE 2019 DAY 3
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Session Unit 2:
LOS 9.h: Calculate and interpret an unconditional
probability using the total probability rule. 9. Probability Concepts
Variance (from the EV), p180, is the probability-weighted sum of the squared differences between each possible outcome
and expected EPS.
Example: Calculating variance from a probability model: Calculate the variance and standard deviation of EPS for Ron’s
Stores using the probability distribution of EPS from the table in the previous example.
LOS 9.i: Explain the use of conditional expectation in investment
applications, p.181
Evs/Returns can be calculated using conditional probabilities. An analyst
would use a conditional expected value to revise his expectations when new
information arrives.
Consider the effect of a tariff on steel imports on the returns of a
domestic steel stock.
The stock’s expected return, given that the government imposes
the tariff, will be higher than the expected return if the tariff is not
imposed.
