Question

Scott Myers is a security analyst for a telecommunications firm called Webtalk. Although he is optimistic about the firm's future, he is concerned that its stock price will be considerably affected by the condition of credit flow in the economy. He believes that the probability is 0.20 that credit flow will improve significantly, 0.50 that it will improve only marginally, and 0.30 that it will not improve at all. He also estimates that the probability that the stock price of Webtalk will go up is 0.90 with significant improvement in credit flow in the economy, 0.40 with marginal improvement, and 0.10 with no improvement in credit flow in the economy. What is the probability that the stock price of Webtalk will go up?

1) 0.90
2) 0.40
3) 0.10
4) Cannot be determined

Answer 1

The probability that the stock price of Webtalk will go up is 0.40.

Step-by-step explanation:

To find the probability that the stock price of Webtalk will go up, we need to calculate the weighted average of the probabilities based on the condition of credit flow in the economy.

First, multiply each probability by the corresponding probability of the stock price going up:

• 0.20 * 0.90 = 0.18
• 0.50 * 0.40 = 0.20
• 0.30 * 0.10 = 0.03

Then, add these weighted probabilities together:

0.18 + 0.20 + 0.03 = 0.40

Therefore, the probability that the stock price of Webtalk will go up is 0.40.