Dhirendra is forecasting a stock’s performance in 2012 conditional on the state of the economy of the country in which the firm is based. He divides the economy’s performance into three categories of good, neutral and poor and the stock’s performance into three categories of increase, constant and decrease. The estimates are: • The probability that the state of the economy is good is 20%. If the state of the economy is good, the probability that the stock price increases is 80% and the probability that the stock price decreases is 10%. • The probability that the state of the economy is neutral is 30%. If the state of the economy is neutral, the probability that the stock price increases is 50% and the probability that the stock price decreases is 30%. • If the state of the economy is poor, the probability that the stock price increases is 15% and the probability that the stock price decreases is 70%. Vikram, his supervisor, asks him to estimate the probability that the state of the economy is neutral given that the stock performance is constant. Dhirendra’s best assessment of that probability is closest to what?
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
Dhirendra is forecasting a stock’s performance in 2012 conditional on the state of the economy of the country in which the firm is based. He divides the economy’s performance into three categories of good, neutral and poor and the stock’s performance into three categories of increase, constant and decrease.
The estimates are:
• The
• The probability that the state of the economy is neutral is 30%. If the state of the economy is neutral, the probability that the stock price increases is 50% and the probability that the stock price decreases is 30%.
• If the state of the economy is poor, the probability that the stock price increases is 15% and the probability that the stock price decreases is 70%.
Vikram, his supervisor, asks him to estimate the probability that the state of the economy is neutral given that the stock performance is constant. Dhirendra’s best assessment of that probability is closest to what?
Step by step
Solved in 2 steps with 1 images
