00:01
Okay, we're looking at a commodity stock price.
00:05
They tell you what the price is on day one.
00:07
That's just a distractor.
00:09
It's really not part of the question.
00:10
So you try to ignore that first part of the sentence.
00:14
A financial expert forecasts the stocks trend for the next two days, day two and day three.
00:19
The probability that the stock price is going to go up on day two is point one.
00:25
If it does go up, then on day three, the probability that it goes up, would be 0 .3.
00:32
If it doesn't go up, then the probability that it goes up on day 3, if day 2 was not up is 0 .8.
00:40
Part of this, we're supposed to make a tree diagram to show the probabilities of the stock price going up or down.
00:52
Okay, so our tree diagram, the first branches will actually be day 2.
00:59
You know, day 1 has nothing to do with this, really.
01:03
So day two, we have a going up, i'll call you, would be a point one is what they're saying.
01:11
That means the probability that it goes down would be 0 .9.
01:16
That has to go on my other branch.
01:19
Then for the third day, we could either go up or down.
01:24
And the probability we go up if we've already went up is 0 .3.
01:32
That means the probability of going down if you've went up on day 2.
01:36
Would be 0 .7.
01:39
Now let's move down here.
01:41
If we went down on day two, that means the probability that we go up on day three is 0 .8.
01:52
And that means the probability on day three would be 0 .2 for going down if we already knew we went down.
02:00
Now to finish up your tree diagram, you want to actually give the probabilities of each of those branches.
02:06
And to find them, you just multiply the probabilities that are on each row.
02:11
So 0 .1 times 0 .3 would be 0 .03.
02:17
Point 1 times 0 .7 would be 0 .07 .9 times 0 .8 would be 0 .72 .9 times 0 .2 would be 0 .18 .9 times 0 .2 would be 0 .18.
02:34
And if we add all those together, you would end up with 1.
02:38
That's an important characteristic of a tree diagram, is we should be able to add all those up and they would add up to all 100 % of the possible outcomes...