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CIMA BA2 Notes Chapter 12- Risk 2 - Probability
CIMA BA2 Notes Chapter 12- Risk 2 - Probability
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BA 2 - Fundamentals of Management AccountingRisk 2 - Probability
Chapter twelve
BA 2.Risk 2 - Probability. Quantia Learning
,We learned that risk is quantifiable; that possible outcomes can be assigned probabilities but
that with uncertainty we cannot assign probabilities. Most people have an intuitive,
common-sense understanding of probabilities.
● "You are more likely to be hit by lightning, than win the
lottery."
BA 2.Risk 2 - Probability. Quantia Learning
, ● "Experience suggests we have a one in ten chance of winning a tender for a new
contract."
These statements relate to the idea of probability.
Probability
A probability expresses the likelihood of an event occurring.
Note the terminology here. The 'event' referred to is simply
what we want to calculate the probability for, such as
'winning the tender' or 'rolling a six'.
Basic ideas :
● If an event is certain to occur, then it has a probability
of one.
● If an event is impossible, then it has a probability of zero.
● For any event, the probability of it occurring must lie between zero and one. If you
calculate a probability bigger than one, then you have made a mistake.
● The higher the probability is, then the more likely it is that the event will happen.
● In any given scenario, the probabilities associated with all possible outcomes must add
up to one.
For example, if trying to win a particular tender for new work, then there are only two possible
outcomes - you either win or you don't. If the probability of winning the tender is 0.4 (40%), then
the probability of not winning must be 0.6 (60%) as the two probabilities must add up to one.
Notion
The probability of event ‘A’ occurring is written as P(A).
This allows us to write down some of the above rules more concisely, for example: P(NOT A) =
1 – P(A), where P(NOT A) means the probability of event A not occurring.
This is known as the 'complementary rule'.
Simple probabilities
In situations where it is possible to compile a complete list of all the equally likely outcomes, we
can define the probability of an event, denoted P(event):
BA 2.Risk 2 - Probability. Quantia Learning
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