Thanks to artificial intelligence, he identifies accounting and corporate characteristics that pinpoint with a relevance error rate of 90% whether a company is concerned or not. Based on this indicator, a manager sorts the stocks in “red” (do not invest) and “green” (invest) and he spots company XYZ which he identifies as red.
Question; what is the percentage of chances that the company really uses these practices? (click to see answer)
For simplicity, we are rounding the numbers.
Let’s consider 1010 companies: 1000 are clean, 10 are to avoid.
Of the 1000 cleans, 100 will be identified as culprit since the test is 90% valid.
Of the 10 culprits, 9 will be identified.
In total, the test therefore identifies 109 culprits out of which 100 are “false positives”.
Spotted stocks have a 100 out of 109 chance of being clean, or 92%, and 9 out of 109, or 8%, of being guilty.
So the answer is: less than 10 %