Chapter 5 · Section 5 practice

Bayesian Signals and Partial Pooling

0 of 2 answered

These questions review the examples in the companion slides. Choose an answer, then check the explanation.

Question 1

Stock A has only three monthly residuals averaging +8%. Stock C has sixty averaging −1%. Under the same prior and residual variance, which receives less weight on its own sample mean?

  • A, because three observations carry less precision
  • C, because negative estimates must be removed
  • Both receive the same weight
  • Neither: Bayesian estimates must equal sample means

Question 2

A posterior gives P(conditional mean > cost) = 0.97. What follows?

  • The next trade has a 97% probability of making money
  • The conditional mean exceeds the hurdle with 97% posterior probability under this model
  • The stock has a causal alpha of 97%
  • The strategy will be profitable after every rebalance