Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Chapter 9.4, Problem 9P
Summary Introduction
To determine: The precision tree’s sensitivity analysis.
Introduction: The variation between the present value of the
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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…
Suppose that you want to invest $10,000 in the stock market by buying shares in one of two companies: A and B. Shares in company A though risky, could yield a 50% return on investment during the next year. If the stock market if conditions are not favorable (bear market) the stock may lose 20% of it value. Company B provides safe investments with 15% return in a bull market and only 5% in a bear market Ali the applications you have consulted are predicting a 60% chance for a bull market and 40% for a bear market. Where you invest your money? Construct a decision tree.
You are given a payoff table: Positive market Negative market Probabililty 0.40 0.60 Alternatives Go 100 150 No Go 200 100 Based on these probabilities, a person would select the option "No Go". However, you have a concern about the accuracy of the probabilities. It can be stated that "No Go" is still the best alternative as long as the probability of option "Go" is at least:
Chapter 9 Solutions
Practical Management Science
Ch. 9.2 - Prob. 1PCh. 9.2 - Prob. 2PCh. 9.2 - Prob. 3PCh. 9.3 - Prob. 4PCh. 9.3 - Prob. 5PCh. 9.3 - Prob. 6PCh. 9.3 - Prob. 7PCh. 9.4 - Explain in some detail how the PrecisionTree...Ch. 9.4 - Prob. 9PCh. 9.4 - Prob. 10P
Ch. 9.5 - Prob. 11PCh. 9.5 - Prob. 12PCh. 9.5 - Prob. 13PCh. 9.5 - Prob. 17PCh. 9.5 - Prob. 18PCh. 9.5 - Prob. 19PCh. 9.5 - Prob. 21PCh. 9.5 - The model in Example 9.3 has only two market...Ch. 9.6 - Prob. 26PCh. 9.6 - Prob. 27PCh. 9.6 - Prob. 28PCh. 9 - Prob. 30PCh. 9 - Prob. 31PCh. 9 - Prob. 32PCh. 9 - Prob. 34PCh. 9 - Prob. 36PCh. 9 - Prob. 37PCh. 9 - Prob. 38PCh. 9 - Prob. 39PCh. 9 - Prob. 46PCh. 9 - Prob. 48PCh. 9 - Prob. 53PCh. 9 - Prob. 67PCh. 9 - Prob. 68PCh. 9 - Prob. 69PCh. 9 - Prob. 70PCh. 9 - Prob. 71PCh. 9 - Prob. 72PCh. 9 - Prob. 73PCh. 9 - Prob. 74PCh. 9 - Prob. 75PCh. 9 - Prob. 76PCh. 9 - Prob. 77P
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