Question
utility function over wealth (w) is u(w) = w. current wealth is comprised of $75 in cash and 25 shares of stock in Minisoft. The
utility function over wealth (w) is u(w) = w. current wealth is comprised of $75 in cash and 25 shares of stock in Minisoft. The current market price of the Minisoft shares is $1 (Jewel can sell her shares for $1 each, or purchase more shares for $1 each.) Minisoft will soon make an important public earnings announcement. With a probability of 1/3, the news will be bad, and the price of each share will decrease to $0. With a probability of 2/3 the news will be good, and the price of each share will increase to $2. How many shares should the person buy or sell ahead of the earnings announcement?
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