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Chapter 2: Q86E (page 112)

Buy-side vs. sell-side analysts’ earnings forecasts. Financial analysts who make forecasts of stock prices and recommendations about whether to buy, sell, or hold specific securities can be categorized as either “buy-side” analysts or “sell-side” analysts. A group of Harvard Business School professors compared earnings forecasts of buy-side and sell-side analysts (Financial Analysts Journal, July/August 2008). Data were collected on 3,526 forecasts made by buy-side analysts and 58,562 forecasts made by sell-side analysts, and the relative absolute forecast error was determined for each.

a. Frequency distributions for buy-side and sell-side analyst's forecast errors (with the sell-side distribution superimposed over the buy-side distribution) are shown in the accompanying figure. Based on the figure, the researchers concluded: “that absolute forecast errors for buy-side analysts have a higher mean and variance than those for the sell-side analysts.” Do you agree? Explain.

b. The mean and standard deviation of forecast errors for both buy-side and sell-side analysts are given in the following table. For each type of analyst, provide an interval that will contain approximately 95% of the forecast errors. Compare these intervals. Which type of analyst is more likely to have a relative forecast error of +2.00 or higher?

Short Answer

Expert verified

  1. No

  2. Buy-side

Step by step solution

01

(a) Buy-side and sell-side analyst

No. Although both data sets have a peak at approximately the same value, the centre of the sell-side data is greater because the buy-side distribution is skewed slightly to the left while sell-side data is symmetric. The sell-side data has a wider distribution than the buy-side data.

02

(b) Buy-side analyst

Buy-side analyst:

Buy-side is likely to have +2, or the whole interval for the sell-side is negative. It is impossible to have a positive error for the sell-side.

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Most popular questions from this chapter

Hotels’ use of ecolabels.Ecolabels such as Energy Star, Green Key, and Audubon Internationalare used by hotels to advertise their energy-saving and conservation policies. The Journal of Vacation Marketing(January 2016) published a study to investigate how familiar travelers are with these ecolabels and whether travelers believe they are credible. A sample of 392 adult travelers were administered a questionnaire. One question showed a list of 6 different eco-labels, and asked, “How familiar are you with this ecolabel, on a scale of 1 (not familiar at all) to 5 (very familiar).” Summarized results for the numerical responses are given in the table.

a.Give a practical interpretation of the mean response for Energy Star.

b.Give a practical interpretation of the median response for Energy Star.

c.Give a practical interpretation of the response mode for Energy Star.

d.Based on these summary statistics, which ecolabel appears to be most familiar to travelers?

Ecolabel

Mean

Median

Mode

Energy Star

4.44

5

5

TripAdvisor

3.57

4

4

Green Leaders Audubon

2.41

2

1

International U.S Green

2.28

2

1

Building Council Green Business

2.25

2

1

Green Key

2.01

1

1

Nuclear power plants.According to the Nuclear Energy Institute (NEI), 62 nuclear power plants were operating in the United States in 2015. The table at top of the next column lists the 30 states that operate nuclear power

plants, the number of plants in each state, and whether the state has passed legislation supporting nuclear energy expansion (regulated) or not (deregulated).

a.Find the mean, median, and mode of the number of power plants per state. Interpret these values.

b.Repeat part afor the regulated states only.

c.Repeat part afor the deregulated states only.

d.Compare the results, parts band c.What inference can you make about the impact that state regulation has on the number of nuclear power plants?

e.Eliminate the state with the largest number of power plants from the data set and repeat part a.What effect does dropping this measurement have on the measures of central tendency found in part a?

f.Arrange the 30 values in the table from lowest to highest. Next, eliminate the lowest two values and the highest two values from the data set and find the mean of the remaining data values. The result is called a 10% trimmed meanbecause it is calculated after removing the highest 10% and the lowest 10% of the data values. What advantages does a trimmed mean have over the regular arithmetic mean?

State

Status

Number of Power Plants

Alabama

Regulated

2

Arizona

Regulated

1

Arkansas

Regulated

1

California

Regulated

1

Connecticut

Deregulated

1

Florida

Regulated

3

Georgia

Regulated

2

Illinois

Deregulated

6

Iowa

Deregulated

1

Kansas

Regulated

1

Louisiana

Regulated

2

Maryland

Deregulated

1

Massachusetts

Deregulated

1

Michigan

Deregulated

3

Minnesota

Regulated

2

Mississippi

Regulated

1

Missouri

Regulated

1

Nebraska

Regulated

2

New Hampshire

Deregulated

1

New Jersey

Deregulated

3

New York

Deregulated

4

North Carolina

Regulated

3

Ohio

Deregulated

2

Pennsylvania

Deregulated

5

South Carolina

Regulated

4

Tennessee

Regulated

2

Texas

Deregulated

2

Virginia

Regulated

2

Washington

Regulated

1

Wisconsin

Deregulated

1

Ranking driving performance of professional golfers.Refer to The Sport Journal(Winter 2007) analysis of anew method for ranking the total driving performance ofgolfers on the PGA tour, Exercise 2.52 (p. 97). Recall thatthe method uses both the average driving distance (yards)and driving accuracy (percent of drives that land in thefairway). Data on these two variables for the top 40 PGAgolfers are saved in the accompanying file. A professionalgolfer is practicing a new swing to increase his averagedriving distance. However, he is concerned that his drivingaccuracy will be lower. Is his concern a valid one? Explain.

Answer the following questions about the variability of data sets:

a.What is the primary disadvantage of using the range to compare the variability of data sets?

b.Describe the sample variance using words rather than a formula. Do the same with the population variance.

c.Can the variance of a data set ever be negative? Explain. Can the variance ever be smaller than the standard deviation? Explain.

Products “Made in the USA.”“Made in the USA” is a claim stated in many product advertisements or on product labels. Advertisers want consumers to believe that the product is manufactured with 100% U.S. labor and materials—which is often not the case. What does “Made in the USA” mean to the typical consumer? To answer this question, a group of marketing professors conducted an experiment at a shopping mall (Journal of Global Business, spring 2002). They asked every fourth adult entrant to the mall to participate in the study. A total of 106 shoppers agreed to answer the question, “‘Made in the USA’ means what percentage of U.S. labor and materials?” The responses of the 106 shoppers are summarized as follows: “100%” (64 shoppers), “75 to 99%” (20 shoppers), “50 to 74%” (18 shoppers), and “less than 50%” (4 shoppers).

a.What type of data-collection method was used?

b.What type of variable, quantitative or qualitative, is measured?

c.Present the data in graphical form. Use the graph to make a statement about the percentage of consumers who believe “Made in the USA” means 100% U.S. labor and materials.
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