Marie Zhou works as a financial analyst for BMU bank in Vancouver. She has been

Question

Marie Zhou works as a financial analyst for BMU bank in Vancouver. She has been very optimistic about a particular equity security over the past year and her success at predicting the movement of securities has been very good – she boasts a 75 percent accuracy rate. Consider the following data on her last 100 predictions:

a) Calculate the probability that the stock will increase when she predicts an increase.

b) Calculate the probability that the stock will decrease when she predicts a decrease.

Security Increased Security Decreased Predicted Security Increase 72 14 Predicted Security Decrease 11 3

Explanation / Answer

let probabilty of security increase =P(I) and decrease =P(D)

probabilty of Security predicted increase =P(PI) and predicted decrease =P(PD)

from above given table

a) probability that the stock will increase when she predicts an increase =P(I|PI) =P(I &PI)/P(PI) =(72/100)/(86/100)=72/86

b)probability that the stock will decrease when she predicts a decrease=P(D|DI)=P(D & DI)/P(DI) =(3/100)/(14/100)=3/14

Security Increased Security Decreased Total Predicted Security Increase 72 14 86 Predicted Security Decrease 11 3 14 Total 83 17 100

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