Question

Imagine you are a financial analyst at an investment bank. According to your research of publicly-traded companies, 60% of the companies that increased their share price by more than 5% in the last three years replaced their CEOs during the period. At the same time, only 35% of the companies that did not increase their share price by more than 5% in the same period replaced their CEOs. Knowing that the probability that the stock prices grow by more than 5% is 4%, find the probability that the shares of a company that fires its CEO will increase by more than 5%.

Answer 1

Answer:

0.0667 = 6.67% probability that the shares of a company that fires its CEO will increase by more than 5%.

Step-by-step explanation:

Conditional Probability

We use the conditional probability formula to solve this question. It is

$P(B|A) = \frac{P(A \cap B)}{P(A)}$

In which

P(B|A) is the probability of event B happening, given that A happened.

$P(A \cap B)$ is the probability of both A and B happening.

P(A) is the probability of A happening.

In this problem:

Event A: Company fires the CEO

Event B: Shares increase by more than 5%.

Probability of a company firing it's CEO:

35% of 100 - 4 = 96%(shares did not increase by more than 5%).

60% of 4%(shared did increase by more than 5%).

So

$P(A) = 0.35*0.96 + 0.6*0.04 = 0.36$

Intersection of events A and B:

Fires the CEO and shared increased by more than 5%, is 60% of 4%. So

$P(A \cap B) = 0.6*0.04 = 0.024$

Probability that the shares of a company that fires its CEO will increase by more than 5%.

$P(B|A) = \frac{P(A \cap B)}{P(A)} = \frac{0.024}{0.36} = 0.0667$

0.0667 = 6.67% probability that the shares of a company that fires its CEO will increase by more than 5%.