Financial Risk Manager Part 1
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The probability of an increase in the annual dividend paid out to shareholders of ABC Limited is 0.4. The probability of an increase in share price given an increase in dividends is 0.7. Determine the joint probability of an increase in dividends and an increase in the share price.
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NNikitesh
A
0.28
B
0.14
C
0.72
D
0.3
Explanation:
Let:
A be the event that the dividend is increased and,
B be the event that the share price increases
Therefore, P(A) = 0.4 and P(B | A) = 0.7
The joint probability of an increase in dividends and an increase in share price is P(B ∩ A)
The multiplication rule of probability states that:
P(B | A) = P(B ∩ A)/P(A)
Hence P(B ∩ A) = P(B | A) * P(A)
= 0.7 * 0.4
= 0.28 or 28% (Note that P(A ∩ B) = P(B ∩ A))
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