An Analyst Expects That 20% of All Publicly Traded Companies

question 26

Multiple Choice

An analyst expects that 20% of all publicly traded companies will experience a decline in earnings next year. The analyst has developed a ratio to help forecast this decline. If the company is headed for a decline, there is a 90% chance that this ratio will be negative. If the company is not headed for a decline, there is only a 10% chance that the ratio will be negative. The analyst randomly selects a company with a negative ratio. Based on Bayes' theorem, the posterior probability that the company will experience a decline is

• A) 18%.
• B) 26%.
• C) 44%.
• D) 69%.

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