3. After Facebook\'s earnings announcement we have the following distribution of

Question

3. After Facebook's earnings announcement we have the following distribution of returns When the stock beats earnings, the probability distribution of returns is normal witha mean of 10% and a standard deviation of 5%. * When the stock miss earnings, the probability distribution of returns is normal with a mean of-5% and a standard deviation of 8%. a. If the stock beats earnings, what is the probability that the Facebook stock has a return greater than 5% (4pts)? b. If the stock miss earnings, what is the probability that the Facebook stock has a return greater than 5% (4pts)? c. If we know the Facebook stock beats earnings expectations 75% of the time, and miss 25% of the time. Ahead of the earnings announcement, what is the probability that Facebook stock will have a return greater than 5% (3pts)?

Explanation / Answer

A) P(X > 0.05) = P((X - mean)/SD > (0.05 - 0.1)/0.05

= P(Z > -1)

= 1 - P(Z < -1)

= 1 - 0.1587 = 0.8413

B) P(X > 0.05) = P((X - mean)/SD > (0.05 - (- 0.05)/0.08)

= P(Z > 1.25)

= 1 - P(Z < 1.25)

= 1 - 0.8944 = 0.1056

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