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CFA Level 1
Quantitative Methods

Bayes Theorem and Investment Strategy

Medium Probability Concepts Bayes Theorem

A recent study on the efficiency of an investment strategy indicates that there are two possible economic conditions:
- Condition A (favorable)
- Condition B (unfavorable)
The probabilities of these conditions are:

  • P(A) = 0.6
  • P(B) = 0.4

From historical data, it is known that:

  • Investment strategy X performs well under favorable conditions (Condition A) with a probability of P(Win | A) = 0.8
  • Investment strategy X performs poorly under unfavorable conditions (Condition B) with a probability of P(Win | B) = 0.2

If the investment strategy X resulted in a win, what is the probability that it was under the favorable economic condition A?

Use Bayes' Theorem to find P(A | Win).

Hint

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