Question :

Suppose that you want to invest $10000 in the stock market by buying shares in one of two companies: A and B. Shares in Company A are risky but could yield a 50% return on investment during the next year. If the stock market conditions are not favourable, the market may lose 20% of its value. Company B provides safe investments with 15% return in the bull market and only 5% return in the bear market. All the publications you have consulted are predicting a 60% chance for a bull market and 40% for a bear market. Use a decision tree to find out where you should invest your money?

Instead of relying solely on these publications, suppose that you have decided to conduct a more personal investigation by consulting a friend who has done well in the stock market. The friend o®ers the general opinion of `for' or `against' investment. This opinion is further quantified in the following manner: If it is a bull market, there is a 90% chance the vote will be `for'. If it is a bear market, the chance of a `for' vote is lowered to 50%. Use this additional information to find out where you should now invest your money? (You must clearly show all your calculations)