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Mathematics, 06.03.2020 19:06 valentinethevast

Suppose y ou currently own 100 shares of stock in ABCCompany. Youhavedecided to sell the stock, but haven’t decided whether y ou will sell today orsell in exactly two weeks. Today, the stock sells for $35.00 per share. Basedon historical data, you have assessedthat the stock has a 60% chance of goingup to $40.00 and a 40% chance of going down to $30.00 at the end of the twoweek period. You are further deciding whether to seek the advice a consultant, who works for a nearby brokerage firm. You feel the consultant’s expertise could provide better estimates on the probabilities of the stock going up to $40.00 or down to $30.00 at the end of the two week period (assume that only these two stock prices are possible). There would be a $100.00 charge for the advice, but you would receive the advice in a matter of hours. You have obtained this consultant’s advise before and have found it to be quite good. When stock prices actually went up, hehad correctly predicted they would go up 85% of the time. When stock prices actually went down, he had correctly predicted they would go down 95% of the time. Order the decisions and uncertainties you face in this decision problem and aggregate them into a decision tree. After labeling both the endpoint values in terms of profitability and the probabilities within the tree, perform backwards induction to determine the optimal strategy. Assume you are an expected value decision maker.

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Suppose y ou currently own 100 shares of stock in ABCCompany. Youhavedecided to sell the stock, but...
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