Researchers compared earnings forecasts of buy-side and sell-side financial anal

Question

Researchers compared earnings forecasts of buy-side and sell-side financial analysts. Data were collected on 8,291 forecasts made by buy-side analysts and 49,218 forecasts made by sell-side analysts, and the relative absolute forecast error was determined for each. The mean and standard deviation of forecasts errors for both types of analysts are given in the accompanying table. Complete parts a through c below.

Buy-Side Analysts

Sell-Side Analysts

Sample Size

8,291

49,218

Mean

0.82

0.06

Standard Deviation

1.04

0.86

a. Construct a 95% confidence interval for the difference between the mean forecast error of buy-side analysts and the mean forecast error of sell-side analysts.

b.  Based on the interval, part a which type of analysis has the greater mean forecast error? Explain.

c. What assumption(s) is (are) necessary for the validity of the inference, part b?

Buy-Side Analysts

Sell-Side Analysts

Sample Size

8,291

49,218

Mean

0.82

0.06

Standard Deviation

1.04

0.86

Explanation / Answer

a)

Two-Sample T-Test and CI

Sample      N    Mean StDev SE Mean
1        8291    0.82   1.01    0.011
2       49218 -0.060 0.860   0.0039

Difference = (1) - (2)
Estimate for difference: 0.8800
95% CI for difference: (0.8594, 0.9006)
T-Test of difference = 0 (vs ): T-Value = 83.93 P-Value = 0.000 DF = 57507
Both use Pooled StDev = 0.8832

b)

since each value of confidence interval > 0

hence Buy-Side Analysts has the greater mean forecast error

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