Portfolio Management and Wealth Planning【Reading 7】
Which of the following actions is most likely the result of applying Bayes’ theorem of conditional probability? A fundamental analyst revises a stock recommendation when: A)
| the firm issues an earnings report. |
| B)
| she revises her inflation expectations. |
| C)
| the firm experiences a major fire that destroys its production line. |
|
A fundamental analyst bases recommendations on firm or market fundamentals such as expected earnings. The fire would signal an unexpected change in the firm’s fundamentals as would a revised earnings announcement. Revising a recommendation based on the probability of a given level of inflation is an example of applying a Bayesian framework to an expectation. That is, the firm’s performance is based conditionally on the probability of a given level of inflation. |