Question

An short-seller in Tesla is worried the latest management earnings forecast is too aggressive and the company will fall short. His favorite analyst that covers Tesla is going to release his report on Tesla the week before the earnings announcement. Report stands for the analyst's report, and Forecast stands for the earnings announcement.

Prior Probabilities	Conditional Probabilities
P(Good Report) = 0.15	P(Above Forecast | Good Report) = 0.8
P(Medium Report) = 0.35	P(Above Forecast | Medium Report) = 0.38
P(Bad Report) = 0.5	P(Above Forecast | Bad Report) = 0.1

(no excel work)

What is the probability the earnings announcement is Above Forecast?

Answer 1

P(above forecast) =P(Good report)*P(above forecast |Good report)+P(Medium report)*P(above forecast |Medium report)+P(bad report)*P(above forecast |Bad report)

=0.15*0.8+0.35*0.38+0.5*0.1

=0.3030