An analyst expects 10% of all public companies will experience a decline in EPS next year. This analyst has develpeed a ratio that forecase decline in EPS. If a company is headed for an EPS decline, there is a 70% prob. that the rartio will be negative. if the company is not head for an EPS decline, there is a 20 % prob. that the ratio will be negative. The analyst randomly selects a company and its ratio is negative. Based on the Bayes theorem the posterior probablity that the company will experience a decline next year is cloest to: A) 3% B) 7% C) 18% D) 28%
I choose D. .1 * .7 = 0.07 .9 * .2 = 0.18 .07 + .18 = .25 .07 / .25 = .28 or 28%
D p(Negative) = .7 *.1 + .9*.2 = .25 p(Decline|Neg) = (.7 * .1 ) / .25 = .28
Yup D. Good job guys!