Question

Buy-side vs. sell-side analysts' earnings forecasts.

In a study published in Financial Analysts Journal (Jul./Aug. 2008), 3526 forecasts made by buy-side analysts and 58,562 forecasts made by sell-side analysts were researched. The relative absolute forecast error was determined for each. The mean and standard deviation of forecast errors for both types of analysts are given below.

    Buy-Side Analysts  

Sample Size: 3,526

Mean: 0.85

Standard Deviation: 1.93

Sell-Side Analysts

Sample Size: 58,562

Mean: -0.05

Standard Deviation: 0.85

Construct a 95% confidence interval to estimate the difference in the mean forecast error of buy-side analysts and sell-side analysts.

Note: Define forecast error of buy-side analysts as the first population.

a.) What is the difference in the sample mean forecast error of buy-side analysts and sell-side analysts?

b.) What is the standard error of the difference in mean?

c.) What is the lower bound / lower limit of the 95% confidence interval?

d.) What is the upper bound / upper limit of the 95% confidence interval?

e.) Interpret the confidence interval.

f.) Based on the confidence interval, which type of the analysts has the greater mean forecast error?

Answer 1