8. Squid Investments is a company that specializes in investing in Mining, Gas and Oil. They...

 

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8. Squid Investments is a company that specializes in investing in Mining, Gas and Oil. They want to decide whether to make an investment of £6,000,000 in the stock of SeaRill Asia or not. SeaRill are planning to mine off the coast of Uqbar where they are certain to find rare earth metals. If successful Squid Investments estimate that SeaRill's stock will rise by 200%, however there are certain risks and it could be that SeaRill's operations will be disrupted leading to a fall in SeaRill's stock to 50% of current value. Squid Investments estimate the probability that the stock will rise is 80% and fall is 20%. (a) Calculate whether Squid Investments should invest in SeaRill according to three different methodologies: worst case analysis, expected payoff, and most likely scenario approach. Which do you think is the correct decision for Squid Investments? (b) There are three types of risk that can occur: a major earthquake (E), a technical error (T) and a political revolution (R). The probabilities for these events are; P(E) = 0.01, P(T) = 0.02 and P(R) = 0.03. Given that SeaRill's stock falls calculate the probability of that each of the risky events occurred (assuming just one actually happened). Marks [7]: 3(a), 4(b) 8. Squid Investments is a company that specializes in investing in Mining, Gas and Oil. They want to decide whether to make an investment of £6,000,000 in the stock of SeaRill Asia or not. SeaRill are planning to mine off the coast of Uqbar where they are certain to find rare earth metals. If successful Squid Investments estimate that SeaRill's stock will rise by 200%, however there are certain risks and it could be that SeaRill's operations will be disrupted leading to a fall in SeaRill's stock to 50% of current value. Squid Investments estimate the probability that the stock will rise is 80% and fall is 20%. (a) Calculate whether Squid Investments should invest in SeaRill according to three different methodologies: worst case analysis, expected payoff, and most likely scenario approach. Which do you think is the correct decision for Squid Investments? (b) There are three types of risk that can occur: a major earthquake (E), a technical error (T) and a political revolution (R). The probabilities for these events are; P(E) = 0.01, P(T) = 0.02 and P(R) = 0.03. Given that SeaRill's stock falls calculate the probability of that each of the risky events occurred (assuming just one actually happened). Marks [7]: 3(a), 4(b)

Answer rating: 100% (QA)

a Investment Decision for Squid Investments We will analyze the investment using three methodologies 1 Worst Case Analysis Here we consider the worstc... View the full answer