A QMB 3600 student is considering buying stock in TESLA, a car company focused o
ID: 2331151 • Letter: A
Question
A QMB 3600 student is considering buying stock in TESLA, a car company focused on fuel-efficiency. On the first day of every month, the student records the National Gas Price average and the TESLA stock price. If the National Gas Price goes down from the previous month, the probability of TESLA stock price going down is 70%. When the National Gas Price goes up from the previous month, the probability of TESLA stock price going up is 85%. History shows there is a 58% chance of the National Gas Price increasing over the next month. What is the probability that the TESLA stock price increases over the next month?
Explanation / Answer
As the TESLA car company focuses on fuel efficiency, the market for TSLA stock is correlated with increase or decrease in fuel price i.e. price of National Gas.
In this problem when price of National Gas down then the chance of TESLA stock is price is to go down is 70% and if National Gas price go up then the chance of TESLA stock price is to go up is 85%. Now there is an indication on the basis of history that the chance of National Gas price to go up is 58%, therefore probability of increasing TESLA stock price is 19.90% (85% × 58% - 70% × 42%).
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