Does anyone know what to do with this? I simply cant grasp the idea nor the formula. Thanks,
as previously noted, learn by drawing the tree diagram. don’t even bother learning the formula. the tree diagram makes it actually a very simple concept.
Thomas Bayes (c. 1702 – April 17, 1761) was a British mathematician and Presbyterian minister, known for having formulated a special case of Bayes’ theorem, which was published posthumously. This theorem is used to calculate probability of event A occuring if additional information is obtaned that event B has already been occurred. Formula: P(event A \given information B) = [P(Information B\ given event A) / P(Infomation B)] x P (event A) Instead of using the above formula you can use the event diagram (the tree diagram, it is like a binomial model of the for yes or no)
Thanks. Can you help to solve the following question please? Bonds rated B have a 25% chance of default in five years. Bonds rated CCC have a 40% chance of default in five years. A portfolio consists of 30% B and 70% CCC-rated bonds. If a randomly selected bond defaults in a five-year period, what is the probability that it was a B-rated bond?
P(B/default) = P(B and default)/P(default) P(B and default) = 0.3*0.25 = 0.075 P(default) = P(B and default) + P(C and default) = 0.075 + 0.7*0.4 = 0.075 + 0.28 P(B/default) = 0.075/(0.075 + 0.28) = (i dunno) 0.22