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
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. Mannings 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?
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