Reference no: EM132036611
1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 60%, whereas the proportion of liquidity traders is 40%. As usual, liquidity traders buy or sell with equal probability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low. The probability that V = $150, conditional that the first trade is a buy, is:
a. P[V = 150 | Buy] = 0.2
b. P[V = 150 | Buy] = 0.3
c. P[V = 150 | Buy] = 0.5
d. P[V = 150 | Buy] = 0.7
e. P[V = 150 | Buy] = 0.8
f. None of the above.
2. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $170 or $250 with equal probability. The proportion of informed traders is 50%, whereas the proportion of liquidity traders is 50%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.
The probability that V = $170, conditional that the first trade is a buy, is:
a. P[V = 170 | Buy] = 0.25
b. P[V = 170 | Buy] = 0.35
c. P[V = 170 | Buy] = 0.50
d. P[V = 170 | Buy] = 0.65
e. P[V = 170 | Buy] = 0.75
f. None of the above.
3. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.
The dealer will set his bid at:
a. Bid = 170
b. Bid = 180
c. Bid = 200
d. Bid = 220
e. Bid = 230
f. None of the above.
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