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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Definitions:

Fraud

Intentional deception made for personal gain or to damage another individual, involving false representation of facts, omission of information, or other deceitful practices.

Illegal Contract

A contract that is void and unenforceable because it involves activities that are against the law.

Quasi-Contract

A legal concept where a court enforces an obligation between parties as if they had entered into a contract, to prevent unjust enrichment.

Pari Delicto

A legal doctrine meaning "in equal fault," used to indicate that two or more parties are equally at fault for a wrong.