Scott is a security analyst concerned about his firm\'s future. He believes that

Question

Scott is a security analyst concerned about his firm's future. He believes that there is a probability of 0.15 that credit flow will improve significantly, 0.55 that it will only improve marginally and 0.30 that it won't improve at all. He also estimates that the probability of the stock price will go up is .80 with significant improvement in credit flow, 0.5 with marginal improvement and 0.10 with no improvement. What's the probability that the stock price goes up? If we know the stock price has gone up, what's the probability that credit flow has improved significantly? 4. a.

Explanation / Answer

Ans:

Given that

P(significantly)=0.15

P(marginally)=0.55

P(not at all)=0.3

P(up/significantly)=0.8

P(up/marginally)=0.5

P(up/not at all)=0.1

a)P(up)=P(up/significanty)*P(significantly)+P(up/marginally)*P(marginally)+P(up/not at all)*P(not at all)

=0.8*0.15+0.5*0.55+0.1*0.3

=0.12+0.275+0.03

=0.425

b)P(significantly/up)=P(up/significantly)*P(significantly)/P(up)

=0.8*0.15/0.425=0.282

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