CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
An analyst prepares base, upside and downside scenarios for a company's operating margin and assigns probabilities of 50%, 20% and 30%. The margins are 12%, 16% and 6%, respectively. The probability-weighted operating margin is closest to:
The probability-weighted operating margin is about 11.0%. It is computed as 0.50 times 12% plus 0.20 times 16% plus 0.30 times 6%, which equals 6.0% plus 3.2% plus 1.8%. Using only the base case would overstate the margin.
- A10.0%
- B11.0%Correct
- C12.4%
Explanation
Expected margin = 0.50×12% + 0.20×16% + 0.30×6% = 6.0% + 3.2% + 1.8% = 11.0%. Using the base case alone gives 12%, and a simple average of the three margins gives 11.33%, neither of which applies the stated probabilities.
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