Steve Has Received a Stock Tip from Monica

question 154

Essay

Steve has received a stock tip from Monica. Monica has told him that XYZ Corp. will increase in value by 100%. Steve believes that Monica has a 25% chance of being correct. If Monica is incorrect, Steve expects the value of XYZ Corp. will fall by 50%. What is Steve's expected utility from buying $1,000 worth of XYZ Corp. stock? Steve's utility of income is U(I) = 50I. Should Steve purchase the stock?

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Definitions:

Sovereign Government

A type of government that operates independently without interference from foreign powers, possessing ultimate authority over a geographical area.

Profitability

The degree to which a business or activity yields profit or financial gain.

Costs Of Production

The total expenses incurred in the process of creating and selling goods or services.