A perfect forecasting ability implies that:
A) the predicted change in earnings are higher than the realized change in earnings.
B) the forecaster outperforms the naive no-change model.
C) the value of Thiel's inequality coefficient will be more than 1.
D) the predicted change in earnings equals difference between actual earnings and forecasted level of earnings.

Question

Quizplus · Accepted Answer

A perfect forecasting ability implies that the predicted change in earnings equals the difference between actual earnings and forecasted level of earnings, which is option D. Option A is incorrect because if the predicted change is higher than the realized change, it would mean that the forecast was inaccurate. Option B is incorrect because outperforming the naive no-change model is not the same as having perfect forecasting ability. Option C is incorrect because if Thiel's inequality coefficient is more than 1, it would mean that the forecast is biased and has a tendency to overestimate or underestimate the actual values.

A Perfect Forecasting Ability Implies That