the odds mentioned in reading 8 and ratio in reading 36 is exactly the same thing?
It’s unlikely, as reading 36 has nothing to do with probabilities.
To which ratio, exactly, are you referring?
debt to equity ratio.
Say a debt to equity ratio of 0.25 is the same as saying having the odds in favour of debt of 0.25?
Odds is a ratio of two probabilities (so not your example). The debt to equity ratio you gave says that for each (1) currency unit of equity we have, we have 0.25 currency units of debt.
The ratio is dimensionless, since the units in the numerator and denominator cancel, but you could attach the currency unit to explain the ratio.
but the calculation is the same, since
D/E
and P(E)/{1-P(E)}
eg. debt is $2, equity is $10. D/E ratio is 2/10 = 0.20
probability of getting 1 in dice is 1/6, not getting 1 is 5/6, frac{1/6}{5/6}=1/5=0.2
The percentage of debt and the percentage of equity aren’t probabilities; they’re simply percentages.
Odds involve probabilities.
No, they’re not remotely the same.
- first I’m not talking about percentage of debt, I’m talking about ratio!
Percentage = probability*100.
0.166667 probabality of getting 1 in a dice roll is the same as 16.66667% chance.
probability = D/(D+E)
percentage = D/(D+E)*100
Both ratio and odds are the event dividend by the complement, while the probability is dividend by the sum of the event and the complement.
for example, the odds of getting 1 in a dice roll is (1/6)/(5/6)=1/5=0.2=1:5
the ratio of of capital structure made up of $100 debt and $500 equity (exactly the same prob as the dice roll example) is $100/$500 = 0.2
They are essentially the same thing except for odds is written with colon, ratio is written as decimal.
probability is a ratio.
debt to equity is a ratio.
that is where the similarity stops.
odds of 3:2 means 3/5 in favor of the event, 2/5 against the event. AND REMEMBER THAT IS PURELY ONLY FOR PROBABILITY AS FOLKS MORE QUALIFIED THAN I HAVE STATED ABOVE.
If you want to go ahead and be so bullheaded and keep stating the same thing over and over again - answer this question - what are the odds of your clearing the exam in Dec?
(And you claim to add value to the forum too?)
Sorry to be so blunt - this exam is not for the weak hearted, neither is it one for the weak ones in concepts. Yes you might turn out to make me wrong and clear the exam - but believe me, you are going to have a really tough time with it.
odds of 3:2 stated in probability using the formula in Reading 36
(3/2)/(1+(3/2)) = 1.5/2.5 = 0.6 (3/5 is 0.6 make sense!)
Then state it in ratio, as in D/E, it’s 0.6/0.4 = 1.5 = odds of 3:2
Oh snap!
You need to go back and study your level 1 material again, obvious forgot the material, or most likely never make the connection between the two concepts like I did, no offence.
You have now had three people – at least two of whom are charterholders, and at least one of whom has two degrees in mathematics – tell you that they are not the same.
Why do you keep arguing?
He’s trolling for stripers in cape cod…
He was trolling for a sex partner in Hook Up, but that doesn’t seem to have gone very well.
Perhaps he lacks adequate tail feathers.
Then why call it “Hook up”?
Anyways, stop digressing from the subject.
Surely the charterholders and the maths major can explain why they are different when
odds of 3:2 stated in probability using the formula in Reading 36
(3/2)/(1+(3/2)) = 1.5/2.5 = 0.6 (3/5 is 0.6 make sense!)
Then state it in ratio, as in D/E, it’s 0.6/0.4 = 1.5 = odds of 3:2
We have explained it.
Odds represent a ratio of probabilities.
Weights aren’t probabilities.
Therefore a ratio of weights isn’t odds.
The subtitle should tell you: Form a study group or a get-together with other CFA candidates.
yes, you are getting the numbers to come out but it does not imply the numbers mean the same thing each time. when you state debt to equity you know the values already. you are simply stating their relationship.
Calculating odds is to come up with a probablity of an even occuring. With debt to equity, I’m not sure it would even make sense to state an “odds of debt” especially if you obtain those odds based on latest debt and equity values.
odds are used to speculate on the outcome of a variable. The meaning behind “odds” is completely different from a ratio, which is a statement about something you had already determined.
If you have 2 men and 1 woman in a room, the ratio of men to women in that room is 2:1. There are no probabilities assigned to that information, that is just a fact…much like the debt to equity ratio. The debt to equity ratio just represents a factual situation of how many units of debt there are to each unit of equity in a company structure. Again, there are no probabilities assigned to this factual information.
If you were then to randomly select a member of that man/woman group, and you had to calculate the probability of randomly selecting one or the other, then sure, the make up of the group (the ratio) would inform the calculation of your odds of which one you were likely to select.
But no one is asking you to randomly select a “debt” or “equity” from a particular company structure, therefore the ratio of debt to equity remains purely a factual representation with no element of odds or probability.
That’s that was the whole point, I was trying to ask that removing the randomness, arn’t odds/ratio indicating to us the same probability.
Thanks for confirming.