Douglass, an imperfect forecaster, correctly predicts 45% of all bull markets an

Question

Douglass, an imperfect forecaster, correctly predicts 45% of all bull markets and 66% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $12,100, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

Douglass, an imperfect forecaster, correctly predicts 45% of all bull markets and 66% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $12,100, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

Explanation / Answer

Timing ability of Douglas = 0.45 +0.66 - 1 = 0.11

For a timing ability of 0.11, he charges 12,100

The Timing ability of Simmonds =1+1-1 =1

Then the charge Simmods should charge = 12100/0.11 = $110,000

The fee that Roy Simmonds should charge is $110,000

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