The probability of an upward or downward stock price movement is 50 percent. Make the additional assumption that if the stock price goes up twice in a row, the probability of a third upward stock price movement is 25 percent (and thus the probability of a downward price movement is 75 percent). Also assume that if the stock price goes down twice in a row, the probability of a third downward stock price movement is 25 percent (and thus the probability of an upward price movement is 75 percent). On average, what price do we pay if we submit a limit order to buy shares at $9.99 per share? Is this preferable to submitting a market order to buy shares right now at $10.00 per share?

Transcribed Image Text:

10.00 10.01 9.99 10.02 10.00 9.98 10.03 10.01 9.99 9.97 10.00 10.01 9.99 10.02 10.00 9.98 10.03 10.01 9.99 9.97

Answer rating: 100% (QA)

Based on the probability details given we will update the de... View the full answer