Question

Consider two stocks. Stock 1 always sells for $10 or $20. If stock 1 is selling for $10 today, there is a .80 chance that it will sell for $10 tomorrow. If it is selling for $20 today, there is a .90 chance that it will sell for $20 tomorrow. Stock 2 always sells for $10 or $25. If stock 2 sells today for $10, there is a .90 chance that it will sell tomorrow for $10. If it sells today for $25, there is a .85 chance that it will sell tomorrow for $25. On the average, which stock will sell for a higher price? Find and interpret all mean first passage times.

Answer 1

To determine which stock will sell for a higher price on average, we need to calculate the expected values of the stocks. Stock 2 has a higher expected value, so it will sell for a higher price on average.

Step-by-step explanation:

To determine which stock will sell for a higher price on average, we need to calculate the expected values of the stocks.

For stock 1, we multiply the probabilities of selling for $10 or $20 by their respective prices and add them together. The expected value for stock 1 is (0.80 * 10) + (0.90 * 20) = 8 + 18 = 26.

For stock 2, we perform the same calculation. The expected value for stock 2 is (0.90 * 10) + (0.85 * 25) = 9 + 21.25 = 30.25.

Therefore, on average, stock 2 will sell for a higher price.

Answer 2

On stock 2 will be has an average sell of $50 for higher price.

Step-by-step explanation:

stock 1 of $10 (today)+ $10 (80% chance tommorow)=$20 stock sell price and for $20(today)+$20(90% chance tommorow)= $40 this two final of price for stock 1.

Stock 2 of $10 (today)+$10(90% chance tommorow)= $20 and of $25(today)+$25(85% chance tomorrow)= $50 this two for final of it's price for stock 2.So as for Stock 2 has the average sell higher price.

Hope this helps you