quant

madhuri1682
Good Student
Posts: 29
Joined: Thu Oct 04, 2012 2:09 am

quant

Postby madhuri1682 » Mon Oct 29, 2012 6:02 pm

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Question 43 – FRM Sample Paper 2011
John is forecasting a stock’s price in 2011 conditional on the progress of certain legislation in the United
States Congress. He divides the legislative outcomes into three categories of “Passage”, “Stalled” and
“Defeated” and the stock’s performance into three categories of “increase”, “constant” and “decrease”
and estimates the following events:
A portfolio manager would like to know that if the stock price does not change in 2011, what the
probability
that the legislation passed is. Based on John’s estimates, this probability is:
A. 15.5%
B. 19.6%
C. 22.2%
D. 38.7%
© Neev Knowledge Management – Pristine 88
Passage Stalled Defeated
Probability of legislative outcome 20% 50% 30%

Probability of increase in stock
price given legislative outcome
10% 40% 70%
Probability of decrease in stock
price given legislative outcome
60% 30% 10%

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: quant

Postby content.pristine » Mon Oct 29, 2012 6:16 pm

You need to use Bayes Theorem for this question.
Let me know if you still have trouble getting the solution..

8-)


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