FINANCE 645 - Say the level of the market as measured by the Dow Jones

1. Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated. Describe how you might debias this individual. Give a numerical example (making up relevant numbers as appropriate).

2. What steps must occur before bias can be successfully expunged? Describe the process.

3. The fact that risk and uncertainty are experienced differently might matter in times of financial crisis. What are the key differences between risk and uncertainty? Discuss.