# Probability question

Explanation of this question does not give me an idea about how to approach it. I mean, looking at the question or wording, how to figure out how to start on solving this question? In fact, I am little shaky on the fundamentals(Bayes formula) being used. Is there any other approach to solve it? Or, worse, this can not be solved by any other approach at all? I normally try to approach these kind of questions by condition probability(probably missing the DO NOT ENTER sign) as I can’t figure out this has to be done using Bayes formula. Can you guys tell me how you guys approach this question? Cheryl Smith, CFA, conducts study comparing dividend changes for energy and non energy companies. Smith determines that 15% of the stock market universe consists of energy companies. Smith also determines that the probability that an energy company will increase its dividend is 90% and the probability that a non energy company will increase its dividend is 30%. After conducting her analysis, Smith randomly selects one company from the universe of stocks from the most recent quarter and notices that the company declared a dividend increase. The probability that Smith randomly selected an energy company is closest to: A. 5% B. 15% C. 35%

sgupta0827 Wrote: ------------------------------------------------------- > Explanation of this question does not give me an > idea about how to approach it. I mean, looking at > the question or wording, how to figure out how to > start on solving this question? > > In fact, I am little shaky on the > fundamentals(Bayes formula) being used. Is there > any other approach to solve it? Or, worse, this > can not be solved by any other approach at all? I > normally try to approach these kind of questions > by condition probability(probably missing the DO > NOT ENTER sign) as I can’t figure out this has to > be done using Bayes formula. Can you guys tell me > how you guys approach this question? > > Cheryl Smith, CFA, conducts study comparing > dividend changes for energy and non energy > companies. Smith determines that 15% of the stock > market universe consists of energy companies. > Smith also determines that the probability that an > energy company will increase its dividend is 90% > and the probability that a non energy company will > increase its dividend is 30%. After conducting her > analysis, Smith randomly selects one company from > the universe of stocks from the most recent > quarter and notices that the company declared a > dividend increase. The probability that Smith > randomly selected an energy company is closest > to: > A. 5% > B. 15% > C. 35% Use the tree… you get answer in seconds… I dont know how to draw it here but make two nodes - 0.15energy and 0.85 non energy .15 energy node splits into two - inc .9 and dec .1 .85 non energy splits into two - inc .3 and dec .7 So total probability of inc is .9*.15 + .3*.85 Probability of energy out of this is .9*.15 you get 34.6%

hmm…Thanks! Tree is definitely better idea but I think I get confused with the wording of the question.

I also use the tree. It does a great job of helping me visualize which prob is which. Almost never use bayes formula, it’s so easy to forget when you are freaked out :))

i always use the tree too, and then just have to apply total probability and bayes formula. Actually with the tree, if you are asking the proba of smthg that is in the root of your tree, (in this case energy or not), then you know you’ll have to use bayes formula after calculating the probability of the leave of your tree using the total proba. If you’re asking the proba of smthg on the leaves regardless of the roof, then total probality only And if smthg on the leaves given the roof, conditional proba

Thanks M^2