a) Your initial belief about stock A is that its future price cannot be predicted on...

a) Your initial belief about stock A is that its future price cannot be predicted on the basis of existing public information. An insider comes forward claiming that the price will fall. You know the insider is not totally reliable and tells the truth with probability p=0.3. Use Bayes’ theorem to calculate the posterior probability that the stock price will fall, based on the insider’s evidence.A second insider, equally unreliable, comes forward and also claims that the price will fall. Assuming that the insiders are not colluding, what is your posterior probability of a price fall? Based on your above answers, does the probability of future stock price depend on unreliable insiders? Would you expect this outcome? Explain your argument.

Expert Solution

Colby Messinger answered 4 months ago

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