An Analyst Expects That 10% of All Publicly Traded Companies

Multiple Choice

An analyst expects that 10% of all publicly traded companies will experience a decline in earnings next year. The analyst has developed a ratio to help forecast this decline. If the company is headed for a decline, there is a 70% chance that this ratio will be negative. If the company is not headed for a decline, there is only a 20% chance that the ratio will be negative. The analyst randomly selects a company and its ratio is negative. Based on Bayes' theorem, the posterior probability that the company will experience a decline is ________.

A) 3%.
B) 7%.
C) 18%.
D) 28%.