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%.

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

In which

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

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

Intersection of events A and B:

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

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

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