Question: The table below shows the state of nature of the future performance of ABC Ltd. GN (good news), and BN (bad news) summarize the information content of current financial statements. ABC Ltd. has just released its quarterly financial report. You analyze the report, and decide that it shows GN. Your decision problem is: • to sell your shares now (a1) or • hold them for another quarter (a2). Financial Statement Information GN BN State of Nature High (H) 0.85 0.15 Low (L) 0.20 0.80 Your prior probability of the high state is 0.75. The current market value of your ABC Ltd. shares is $76. If ABC is in a high state, you are sure that your shares will be worth $81 if you sell at the end of the next quarter. If ABC is in a low state, you are sure that your shares will then be worth $16. You are risk-averse, with utility equal to the square root of your sale proceeds. Required:
1. What information is included in your prior probabilities? Are they subjective or objective? Why?
2. Are the information system probabilities subjective or objective? What determines these probabilities?
3. Should you sell or hold your ABC