Question

A security analyst for a communications firm called Webtalk is optimistic about the future of the firm and concerned that its stock price will be considerably affected by the condition of credit flow in the economy. The analyst believes that there is a 20% chance that the credit flow will improve significantly, a 50% chance that the credit flow will improve only marginally while there is another chance that the credit flow will not improve at all. Further, the analyst estimates the chance that the stock price of Webtalk goes up to be 90% with a significant improvement in credit low in the economy, 40% with only a marginal improvement in credit low in the economy and 10% with no improvement at all in credit low in the economy (You may use a tree diagram for this problem) Select the probability that the stock price of Webtalk goes up and there is a no improvement at all in the economy. 0.9x0.3 -0.27 O 0.1x0.3 0.03 0.1x0.4 -0.04 O 0.3x0.3 -0.09

Answer 1

P(no improvement at all in economy) = 1 - 0.2 - 0.5 = 0.3

P(goes up | no improvement) = 0.1

P(Goes up) = 0.1*0.3 = 0.03

Hence, Option B) 0.1x0.3 = 0.03 is the answer for this.

I hope this will help. Thank you.