In order to pay her credit card bills from the Christmas shopping season, Natasha decides to sell her entire holding of one share of Teeesla Inc., which is a famous electric car manufacturer. The current share price is $250 per share. If Teeesla is a high-quality company, the share price will rise to $400 by the end of next week; if Teeesla is a low-quality company, the share price will drop to $100 by the end of next week. Based on the information currently available in the market, Natasha assesses the probability that Teeesla is a high-quality (low-quality) company is 0.5 (0.5). Natasha is a rational investor and makes decisions to maximize her expected utility. Her utility for the total proceeds from the sale (x) is described by the following function f(x): ????(????)=√x Required (show calculations for full credits) 

(a) On the basis of her current expectation, should Natasha sell now at the price of $250 per share or wait to sell at the end of next week? (5 marks) 

(b) What can be learned about Natasha’s risk preference from her utility function? Discuss. (5 marks) Note: Part (c) and Part (d) involve two alternatives scenarios that do not happen at the same time. Please answer the two parts separately. 

(c) Alternative Scenario 1. Suppose before Natasha gets a chance to act on her decision made in part (a), Teeesla has released some new accounting information showing good performance. The informativeness of Teeesla’s accounting performance about Teeesla’s true quality can be summarized by the following information system: Teeesla’s true quality High quality Low quality Teeesla’s accounting performance 

Good     0.7      0.3 

Bad       0.3.      0.7 

Following Teeesla’s release of accounting information, its share price immediately moved up to $260 per share. Should Natasha sell now at the new price of $260 per share or wait to sell at the end of next week?

(d) Alternative Scenario 2. Suppose before Natasha gets a chance to act on her decision made in part (a), Teeesla has released some new accounting information showing good performance. However, it is known that Teeesla has some material internal control weaknesses and thus the informativeness of its accounting performance about its true quality can be summarized by the following information system: Teeesla’s true quality High quality Low quality Teeesla’s accounting performance 

Good   0.5     0.5 

Bad     0.5     0.5 

Following Teeesla’s release of accounting information, its share price immediately moved up to $260 per share. Should Natasha sell now at the new price of $260 per share or wait to sell at the end of next week? 

(e) Compare the answers to Part (c) and Part (d) and discuss the relevance of accounting information reliability in the Bayesian framework. (5 marks)

Answer rating: 100% (QA)

a On the basis of her current expectation should Natasha sell now at the price of 250 per share or wait to sell at the end of next week 5 marks ANSWER As Natasha is a rational investor and makes decis... View the full answer