Financial Risk Manager Part 1

Explanation

This question uses the addition rule of probability to find the probability of either event E or event M occurring.

Given:

• P(E) = 0.18 (probability Eurozone economy will grow)
• P(M) = 0.26 (probability ECB will loosen monetary policy)
• P(E∩M) = 0.12 (joint probability both events occur)

Formula:

The addition rule states: P(E ∪ M) = P(E) + P(M) - P(E∩M)

Calculation:

P(E ∪ M) = 0.18 + 0.26 - 0.12 = 0.32

Result:

The probability that either the Eurozone economy will grow OR the ECB will loosen its monetary policy is 32%.

Why this works:

• When we add P(E) and P(M), we double-count the intersection P(E∩M)
• We subtract P(E∩M) to avoid this double-counting
• This gives us the probability of at least one of the events occurring