medium · Quantitative Finance
A proprietary trading signal has a 15% prior probability of identifying a high-alpha stock. The signal has a 85% sensitivity (true positive rate) but also a 25% false positive rate.
If the signal fires for a specific stock, what is the updated posterior probability that the stock actually possesses high alpha?
- 37.5%
- 51.0%
- 85.0%
- 33.8%
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