On Monday, a certain stock closed at $10 per share. Before the stock market opens on Tuesday, you expect the stock to close at $9, $10, or $11 per share, with respective probabilities 0.3, 0.3, and 0.4. Looking ahead to Wednesday, you expect the stock to close 10 percent lower, unchanged, or 10 percent higher than Tuesday’s close, with the following probabilities. Tuesday's Close 10 Percent Lower Unchanged 10 Percent Higher $9 0.4 0.3 0.3 10 0.2 0.2 0.6 11 0.1 0.2 0.7 Early on Tuesday, you are directed to buy 100 shares of the stock before Thursday. All purchases are made at the end of the day, at the known closing price for that day, so your only options are to buy at the end of Tuesday or at the end of Wednesday. You wish to determine the optimal strategy for whether to buy on Tuesday or defer the purchase until Wednesday, given the Tuesday closing price, to minimize the expected purchase price. Develop and evaluate a decision tree. a-1. Determine the optimal strategy. If the stock closes at $9, what should you do? wait and purchase on Wednesday or buy now on Tuesday? a-2. Determine the expected purchase price. Expected purchase price: b-1. Determine the optimal strategy. If the stock closes at $10, you should. wait and purchase on Wednesday or buy now on Tuesday? b-2. Determine the expected purchase price. Expected purchase price: c-1. Determine the optimal strategy. If the stock closes at $11, you should. wait and purchase on Wednesday or buy now on Tuesday? c-2. Determine the expected purchase price. Expected purchase price:

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

See similar textbooks

Related questions

Concept explainers

Question

On Monday, a certain stock closed at $10 per share. Before the stock market opens on Tuesday, you expect the stock to close at $9, $10, or $11 per share, with respective probabilities 0.3, 0.3, and 0.4. Looking ahead to Wednesday, you expect the stock to close 10 percent lower, unchanged, or 10 percent higher than Tuesday’s close, with the following probabilities.

Tuesday's Close	10 Percent Lower	Unchanged	10 Percent Higher
$9	0.4	0.3	0.3
10	0.2	0.2	0.6
11	0.1	0.2	0.7

Early on Tuesday, you are directed to buy 100 shares of the stock before Thursday. All purchases are made at the end of the day, at the known closing price for that day, so your only options are to buy at the end of Tuesday or at the end of Wednesday. You wish to determine the optimal strategy for whether to buy on Tuesday or defer the purchase until Wednesday, given the Tuesday closing price, to minimize the expected purchase price.

Develop and evaluate a decision tree.

a-1. Determine the optimal strategy. If the stock closes at $9, what should you do?

wait and purchase on Wednesday or buy now on Tuesday?

a-2. Determine the expected purchase price.

Expected purchase price:

b-1. Determine the optimal strategy. If the stock closes at $10, you should.

wait and purchase on Wednesday or buy now on Tuesday?

b-2. Determine the expected purchase price.

Expected purchase price:

c-1. Determine the optimal strategy. If the stock closes at $11, you should.

wait and purchase on Wednesday or buy now on Tuesday?

c-2. Determine the expected purchase price.

Expected purchase price:

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, operations-management and related others by exploring similar questions and additional content below.

Similar questions