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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Research

An analyst's base-case EPS forecast for Kaveri Foods is ₹40. She assumes bad, base and good scenarios with EPS of ₹30, ₹40 and ₹55 and probabilities of 30%, 50% and 20% respectively. What is the probability-weighted expected EPS, and how does it compare with the base case?

Expected EPS is 0.30×30 + 0.50×40 + 0.20×55 = 9 + 20 + 11 = ₹40, which equals the base-case estimate. The positive skew of the good scenario is exactly offset by the weight on the bad scenario.

  1. A₹40, equal to the base case
  2. B₹41, ₹1 above the base caseCorrect
  3. C₹42.5, ₹2.5 above the base case
  4. D₹39, ₹1 below the base case

Explanation

Expected EPS = 0.30×30 + 0.50×40 + 0.20×55 = 9 + 20 + 11 = ₹40. Checking: sum of probabilities is 100%, and the weighted total 9+20+11 is 40. So the expected EPS equals the base case, not a higher or lower figure.

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