Douglass, an imperfect forecaster, correctly predicts 22% of all bull markets an

Question

Douglass, an imperfect forecaster, correctly predicts 22% of all bull markets and 87% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $24,300, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

Douglass, an imperfect forecaster, correctly predicts 22% of all bull markets and 87% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $24,300, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

Explanation / Answer

Solution.

The fee that Roy Simmonds should charge is =

= 24,300 / (0.22 + 0.87 -1)

= $270,000.

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