Question
A person buys stock of a certain company at a price of 3 cents a share. The investor decides to sell her shares if their
A person buys stock of a certain company at a price of 3 cents a share. The investor decides to sell her shares if their value decreases to 1 cent or becomes greater that or equal to 5 cents. Let Xn be the value of the shares (for the investor) after n days. We suppose {xn, n = 0, 1, } is a Markov chain having a state space {0, 1, , 7}, and for which rows 3 to 5 (corresponding to states 2,3,4) of the one-step transition probability matrix P are the following: P = 1/8 1/4 1/4 1/8 0 0 0 0 1/12 1/7 1/4 1/21 1/4 1/7 1/12 0 0 1/12 1/7 1/4 1/21 1/4 1/7 1/12 Give the other rows of P. Draw the transition diagram and classify all states.
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