My question is regarding the answer that appears for this problem. The book says the answer is calclulated by: 30% / 51.25% = 58.25%. However, according to Bayes’ theorem: P(I|O)= [P(O|I) / P(O)] x P(I) So, why don’t they later multiply the 58.25% above by the 75% that is the probabilitiy of Score >= 20? Thanks for your help guys.
don’t even bother with that equation. learn with the tree. it’s outlined in schweser.
You’re right. With the formula I had confused the conditional probability with the joint prob. so there was no need to multiply again by 75% because the 30% was already 75% times 40%. With the tree it’s easier not to get confused. Thanks.
Based on the number of probability questions on June I would study this for exactly 4 minutes.
Sorry for digging up an old thread but my query was related to this question or rather this type of question. How to identify that a question is based on Bayes Theorem?
In the given question, based on the wordings, my understanding was that we have to find P(default n score>= 20) i.e. Joint probability of default & score>= 20 rather than P(score>=20/default) i.e. probability of score>=20 given that bond defaults
Bayes’ Theorem is used to update your probabilities based on new information. If you see that they mention something about new information, there is a good chance you have to use Bayes’ formula.