Consider two stocks. Stock 1 always sells for $10 or$20. If stock 1 is selling for $10 today, there is a .80 chancethat it will sell for $10 tomorrow. If it is selling for $20today, there is a .90 chance that it will sell for $20 tomorrow.Stock 2 always sells for $10 or $25. If stock 2 sells todayfor $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 itwill sell tomorrow for $25. On the average, which stock willsell for a higher price? Find and interpret all mean firstpassage times.
Compound Probability
Compound probability can be defined as the probability of the two events which are independent. It can be defined as the multiplication of the probability of two events that are not dependent.
Tree diagram
Probability theory is a branch of mathematics that deals with the subject of probability. Although there are many different concepts of probability, probability theory expresses the definition mathematically through a series of axioms. Usually, these axioms express probability in terms of a probability space, which assigns a measure with values ranging from 0 to 1 to a set of outcomes known as the sample space. An event is a subset of these outcomes that is described.
Conditional Probability
By definition, the term probability is expressed as a part of mathematics where the chance of an event that may either occur or not is evaluated and expressed in numerical terms. The range of the value within which probability can be expressed is between 0 and 1. The higher the chance of an event occurring, the closer is its value to be 1. If the probability of an event is 1, it means that the event will happen under all considered circumstances. Similarly, if the probability is exactly 0, then no matter the situation, the event will never occur.
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.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
