Which of the following actions is most likely the result of applying Bayes’ theorem of conditional probability? A fundamental analyst revises a stock recommendation when:
A) the firm experiences a major fire that destroys its production line. B) the firm issues an earnings report. C) she revises her inflation expectations. * From Qbank
I reread the kaplan rationale but still don’t have idea about it…
Answer: C
Kaplan Rationale:
A fundamental analyst bases recommendations on firm or market fundamentals such as expected earnings. The fire would signal an unexpected change in the firm’s fundamentals as would a revised earnings announcement. Revising a recommendation based on the probability of a given level of inflation is an example of applying a Bayesian framework to an expectation. That is, the firm’s performance is based conditionally on the probability of a given level of inflation.