Page 6 - FINAL CFA I SLIDES JUNE 2019 DAY 3
P. 6
Session Unit 2:
9. Probability Concepts
LOS 9.d: Distinguish between unconditional and conditional probabilities. P.172
Unconditional p (a.k.a. marginal p) is the p of an event regardless of the past or future occurrence of other
events, e.g. p of an economic recession irrespective of changes in interest.
In A conditional probability (CP), the occurrence of one event affects the p. of the occurrence of another
event, e.g. the p of a recession if/given SARB raises repo.
P(recession | increase in interest rates); Also called likelihood
LOS 9.e: Explain the multiplication, addition, and total probability rules, p.172
The multiplication rule is for the Joint Probability (JP) of 2 events: P(AB) = P(A | B) × P(B)
The addition rule is for p that at least 1 of 2 events will occur: P(A or B) = P(A) + P(B) – P(AB)
The total probability rule is used to determine UCP of an event, given CPs:
UCP (A) or P(A) = P(A | B1) * P(B1)
+ P(A | B2) * P(B2)
+ P(A | B3) * P(B3) …….where B1, B2,…BN is a mutually
… + P(A | BN) * P(BN) exclusive and exhaustive set of outcomes.
