1. Suppose you currently own 100 shares of stock in ABC Company. You have decided to sell the stock, but haven't decided whether you will sell today or sell in exactly two weeks. Today, the stock sells for $35.00 per share. Based on historical data, you have assessed that the stock has a 60% chance of going up to $40.00 and a 40% chance of going down to $30.00 at the end of the two week 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, he had 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. 1. Suppose you currently own 100 shares of stock in ABC Company. You have decided to sell the stock, but haven't decided whether you will sell today or sell in exactly two weeks. Today, the stock sells for $35.00 per share. Based on historical data, you have assessed that the stock has a 60% chance of going up to $40.00 and a 40% chance of going down to $30.00 at the end of the two week 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, he had 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
