Financial analysts who make forecasts of stock prices are categorized as either

Question

Financial analysts who make forecasts of stock prices are categorized as either "buy-side" analysts or "sell-side" analysts. The mean and standard deviation of the forecast errors for both types of analysts are shown in the table to the right. Assume that the distribution of forecast errors are approximately normally distributed.

                                   Buy-Side Analysts      Sell-Side Analysts

Mean                           0.81                             -0.09

Standard Deviation      1.94                             0.84

a. Find the probability that a buy-side analyst has a forecast error of +2.02 or higher. (Round to three decimal places as needed.)

b. Find the probability that a sell-side analyst has a forecast error of +2.02 or higher. (Round to three decimal places as needed.)

Explanation / Answer

Solution:

a) probability that a buy-side analyst has a forecast error of +2.01 or higher = P(X 2.01)
= P([x - ] / [2.02 - ] / )
= P(z [2.02 - 0.81] / 1.94 ) ;z = [x - ] / is the standard normal variable
= P(z 0.6237)
= 1- P (z 0.6237)
= 1- 0.7336
= 0.2664

b) z = ( x - ) / = (2.02 +0.09) / 0.84= 2.5119
P (2.5119 < x) = P (2.5119 < z) = 0.9939

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