Fred Flint owns 1000 shares in the Bedrock Company. The shares are currently worth £2.80 each. Fred is considering whether to (i) hold the shares for one year and then sell, or (ii) sell the shares now and buy stock at £80 per stock in the MightyBig Corporation. He estimates that the price of the MightyBig stock in a year’s time will be £87, £80, or £70 with probabilities of 0.5, 0.3, and 0.2 respectively. At the end of one year, Bedrock’s share price and dividend depend upon Table 3.9.

Table 3.9 Share price Probability Share dividend Up 20% 0.1 £0.5 Same 0.5 £0.2 Down 10% 0.4 None Use Excel to draw a decision tree for Fred Flint’s investment problem, and hence determine his best policy.

(Answer: best policy is to buy the MightyBig stock.)