Suppose

you receive an e-mail from a stock broker who claims to be able to

accurately predict whether any given stock will rise or fall in price

during the subsequent month. To “prove” her claim, she makes a

prediction about performance (higher price or lower price) for ten

stocks over the next month. You are skeptical of the broker’s claim, and

assume she simply guesses which stocks will improve or worsen in price

over any given month. Put another way, you assume she has a 50% chance

of being correct in her prediction for any given stock. Based on this

assumption, you derive the following probabilities concerning her ten

picks: Number of correct picks

0

1

2

3

4

5

6

7

8

9

10

Probability

0.001

0.01

0.044

0.117

0.205

0.246

0.205

0.117

0.044

0.01

0.001

What is the empirically testable conclusion resulting from your deductive reasoning?

How could you test your empirically testable conclusion using a data sample?

Outline

the inductive and deductive reasoning you could use to evaluate whether

or not the broker is simply guessing in her stock picks.

Requirements: .doc file