CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
An analyst prepares base, best and worst cases for a manufacturer's operating margin and assigns probabilities of 50%, 20% and 30%. The margins are 12%, 16% and 6%. The probability-weighted operating margin is closest to:
The probability-weighted operating margin is about 11.0%. Multiplying each scenario margin by its probability gives 6.0%, 3.2% and 1.8%, which sum to 11.0%. The base case of 12% overstates the expected margin because the worst case carries more weight than the best case.
- A10.0%
- B11.0%Correct
- C12.0%
Explanation
0.50×12% = 6.0%; 0.20×16% = 3.2%; 0.30×6% = 1.8%. Sum = 11.0%. Using the base case alone gives 12%, ignoring the skew from the worst case; a simple average of 11.33% would ignore the probabilities.
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