Mr. Manning is looking to invest in a one-year stock option and has four possibl

Question

Mr. Manning is looking to invest in a one-year stock option and has four possible options. The four options have various rates of return based on whether or not the market rises or fall within the coming year. After consulting with his financial planner, he has the following estimates based on the various market outcomes:

Stock

Market Rising

Market Stable

Market Falling

SUA

$68,082

$47,373

$36,362

YSP

$64,850

$49,320

$44,865

HTC

$57,198

$52,949

$50,605

YHA

$59,766

$59,766

$59,766

Mr. Manning’s planner has estimated that the probability the market rises is 60%, stays stable is 30%, and falls is 10%. To assist Mr. Manning in his decision, build a decision tree to model the decision and answer the following question. You do not need to upload your decision tree for this question.

Which stock is the best expected value decision and what is the expected value of that decision?

Which stock is the worst expected value decision?

Stock

Market Rising

Market Stable

Market Falling

SUA

$68,082

$47,373

$36,362

YSP

$64,850

$49,320

$44,865

HTC

$57,198

$52,949

$50,605

YHA

$59,766

$59,766

$59,766

Explanation / Answer

Multiply the probability of each market outcome with the estimate of that stock for that market outcome Probability of market outcome 0.6 0.3 0.1 Stock Market rising Market stable Market falling Expected value SUA 68082 47373 36362 58697.30 YSP 64850 49320 44865 58192.50 HTC 57198 52949 50605 55264.00 YHA 59766 59766 59766 59766.00 The best expected value decision is stock YHA and the expected value is $59766. The worst expected value decision is stock HTC.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.