AD Problem Set 2015 Session 2
Problems for Session 2
1. 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 hugely affected by the condition of credit flow in the economy. He believes that the probability is 0.2 that credit flow will improve significantly, 0.5 that it will improve only marginally and 0.3 that it would not improve at all. He also estimates that the probability that the stock price of Webtalk will go up by at least 20% is 0.9 with significant improvement in credit flow, 0.4 with marginal improvement in credit flow and 0.1 with no improvement in credit flow.
a) What is the unconditional probability that the stock price of Webtalk goes up by at least 20%?
b) Given that the stock price of Webtalk has not gone up by more than 20%, what is the probability that there was no improvement in credit flow?
2. Mektek, a new company, is thinking about developing a smartphone. However, before they start developing the smartphone, they want to make sure that it will make sense to invest on this. They are planning to employ a market survey farm to sense the market. The following are the considerations:
The market survey can predict 3 scenarios: high, medium or low demand. In a high demand situation, Mektek makes a profit of Rs. 10,00,00,000 (10 Crores). In case of medium demand, they make a profit of Rs. 1,00,00,000 (1 Crore), and in case of a low demand, they lose Rs.
2,00,00,000 (2 Crores).
The probabilities with which the market survey will predict high, medium or low demand are
40%, 20% and 40% respectively. The problem is that historically when such a survey had predicted high demands, 40% of the time it were wrong, half of such cases in fact being that of low demand, and rest of medium demand.
1. 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 hugely affected by the condition of credit flow in the economy. He believes that the probability is 0.2 that credit flow will improve significantly, 0.5 that it will improve only marginally and 0.3 that it would not improve at all. He also estimates that the probability that the stock price of Webtalk will go up by at least 20% is 0.9 with significant improvement in credit flow, 0.4 with marginal improvement in credit flow and 0.1 with no improvement in credit flow.
a) What is the unconditional probability that the stock price of Webtalk goes up by at least 20%?
b) Given that the stock price of Webtalk has not gone up by more than 20%, what is the probability that there was no improvement in credit flow?
2. Mektek, a new company, is thinking about developing a smartphone. However, before they start developing the smartphone, they want to make sure that it will make sense to invest on this. They are planning to employ a market survey farm to sense the market. The following are the considerations:
The market survey can predict 3 scenarios: high, medium or low demand. In a high demand situation, Mektek makes a profit of Rs. 10,00,00,000 (10 Crores). In case of medium demand, they make a profit of Rs. 1,00,00,000 (1 Crore), and in case of a low demand, they lose Rs.
2,00,00,000 (2 Crores).
The probabilities with which the market survey will predict high, medium or low demand are
40%, 20% and 40% respectively. The problem is that historically when such a survey had predicted high demands, 40% of the time it were wrong, half of such cases in fact being that of low demand, and rest of medium demand.