Zachros A.

asked • 09/27/14

the consultant tells the investor interest rates will stay the same, what probability should the investor attach to the event that they actually will increase?

An investor is unsure whether interest rates will increase (I), remain the same (S), or decrease (D) by mid-summer. Based on his own experience, he attaches the following probabilities to these events: P(I) = .4, P(S) = .3, and P(D) = .3. However, he decides to purchase the advice of a consultant. The consultant’s “track record” is summarized below.
The consultant’s “track record” is summarized below.
P(CI | I)=.7 P(CI | S)=.4 P(CI | D)=.2
remain the same (CS) P(CS | I)=.2 P(CS | S)=.5 P(CS | D)=.2
decrease (CD) P(CD | I)=.1 P(CD | S)=.1 P(CD | D)=.6

Dattaprabhakar G.

P(I | CS) = P ( I, CS) / P(CS) = P( CS | I)P(I)]

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09/28/14

Dattaprabhakar G.

Sorry, something happened to my iPad and the earlier incomplete comment was sent. Dr. G.

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09/28/14

1 Expert Answer

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Dattaprabhakar G. answered • 09/28/14

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