What is the probability of positivity inside information

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Reference no: EM13225911

On any given day, the price of stock XX can do one of three things: jump very high, fall very low, or stay reasonably close to its opening value. You are trying to use Bayes' Law to determine if stock XX is being bought or sold by shareholders with "inside information", that is, information not available to the public. The probability, on a given day, of there being some inside information is only 0.02. If there is inside information, it is equally likely to be positive or negative information. If it is positive information, the stock price will surely jump very high (with probability 1). If it is negative information, the price will surely fall very low. However, when there is no inside information, there is still a 3% chance of the price jumping very high and a 3% chance of the price falling very low. Given that the price jumps very high, what is the probability that there is positive inside information?

Reference no: EM13225911

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