Chester Murphy, CFA, is a stok analyst who screens stocks based on market capitalization and earnings momentum. Specifically, Murphy selects stocks that have mkt. cap less than $1 billion(“small cap”), and that have 5-year annualized earnings growth of at least 25%(“high earnings momentum”). The probability that a randomly selected stock is a small cap stock is 20%. The probability that a company has high earnings momentum, given that it is a small cap stock, is 40%. Calculate the probability that a randomly selected stock fits Murphy’s dual investment criteria and determine what type of probability the calculation represents. Can’t figure out the probability, any help?
p(both small cap and high momentum) = 0.2 * 0.4 = 0.08 = 8% p(AB) = P(A bar B) * P(B) Joint probability.