Two investment options exhibit the following range of outcomes, depending on the state of the economy:StateOption 1900Option 2200BoomNormal300400Recession-900-200The chances that the economy will boom, be normal, and contract are, respectively, 30% (boom), 40% (normal), and 30% (recession). If the decision maker is risk-averse, which of the following statements is true?The expected value is higher for Option 1, and variance is higher for Option 1 as well. Therefore, a risk-averse decision maker prefers to invest in Option 1.The expected value is higher for Option 1, but variance is higher for Option 2. It is not clear whether a risk-averse decision maker prefers to invest in Option 1 orOption 2.The expected value is higher for Option 2, and variance is higher for Option 2 as well. It is not clear whether a risk-averse decision maker prefers to invest inOption 1 or Option 2.The expected value is higher for Option 2, and variance is higher for Option 1. Therefore, a risk-averse decision maker prefers to invest in Option 2.

Expected value is calculated for the distribution function to determine their mean. It is calculated…

Answered: Two investment options exhibit the…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

See similar textbooks

Similar questions

The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars): State of Nature Low Demand Medium Demand High Demand Decision Alternative s1 s2 s3 Manufacture, d1 -20 40 100 Purchase, d2 10 45 70 The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30. What is Gorman's optimal decision strategy?Decision strategy:If F then .If U then . What is the expected value of the market research information?Expected value: $ What is the efficiency of the information? If required, round your answer to one decimal place.Efficiency:
Brandon is setting up his own carnival game. His plan is to make sure that the game has a negative expected value, because that will be the most beneficial for his own profit. He decides to set the following rules. You pay $10 to play, and then you get to throw one dart at a dartboard. The dartboard is broken up into 8 equally sized sections. 3 of the sections are red. 4 of the sections are blue. 1 of the sections is green. If your dart hits the green section, Brandon hands you $30. If your dart hits any of the red sections, he gives you $15. If your dart hits any of the blue sections, you win nothing. What is the expected value for one turn? (Just write the number rounded to the nearest thousandths without the dollar sign. ie. 0.123 or -0.123)
ANOTHER EXAMPLE• Consider the following information on returnsand probabilities: State Probability X ZBoom .25 15% 10%Normal .60 10% 9%Recession .15 5% 10% • What are the expected return and standarddeviation for a portfolio with an investmentof $6,000 in asset X and $4,000 in asset Z?
An actuary is analyzing the lapse experience of his company's whole life product. The tabulated results are as follows: Age group % of whole life policyholders probability of lapsing 8 % < 20 5 % 20 – 29 13 % 5 % 30 – 39 21 % 4 % 40 – 49 29 % 4 % 50 – 59 17 % 3 % 60 + 12 % 2 % Since the age group 40-49 is the most profitable, what is the probability that a lapsed policy will belong to this cohort?
5
A payoff table is given as S1 S2 S3 D1 250 750 500 D2 300 -250 1200 D3 500 500 600 a. What choice should be made by the optimistic decision maker? b. What choice should be made by the conservative decision maker? c. What decision should be made under minimax regret? d. If the probabilities of d1, d2, and d3 are .2, .5, and .3 respectively, then what choice should be made under expected value?
Bakery Products is considering the introduction of a new line of products. In order to produce the new line, the bakery is considering either a major or minor renovation of the current plant. Bakery Products has the option of not developing the new line at all. The decision alternatives are shown in the payoff table below as well as the states of nature and probabilities. Payoffs are profits; States of Nature with Profits ($) Decision Alternatives Favourable (F) Neutral Market (U) Unfavourable (U) Major Renovation Minor Renovation $10,000 $5,000 $0 $4,000 $2,000 $0 - $9,000 - $2,000 $0 Do Nothing Probability 0.3 0.4 0.3 Before making the final decision, Bakery Products can pay a market research firm $500.00 to survey consumer attitudes towards the company's products. The results can be either “vibrant" or “limp". The reliability of the company, based on past performance, is given below. Conditional Probability For A Given state of nature Survey Results Vibrant (V) Limp (L) Favourable…
A company is facing three types of decisions for the purchasing of a seasonal product. The profitprojection may depend on the demand level. The payoffs for the situations are given in the followingtable:DemandDecision High (s1) Medium (s2) Low (s3)d1 60 60 50d2 80 80 30d3 100 70 101. If the prior probabilities are 0.3, 0.3, and 0.4, respectively, what is the recommended decision?Show all the calculations and answer with a decision tree.2. At each preseason sales meeting, the vice president of sales provides a personal opinion regarding potential demand for the product. The prediction of the vice president have alwaysbeen either excellent (E) or very good (G). Posterior probabilities are as follows.P(V)=0.7; P(E)=0.3P(s1|E)=0.34; P(s1|V)=0.2P(s2|E)=0.32; P(s2|V)=0.26;Use a decision tree to give the optimal decision strategy.43. Give the EVPI and the EOL, and EVSI.4. Suppose that the prior probability of a low demand is always fixed to 0.4, give a sensitivityanalysis on the other…
You have done risk analysis and determine the following risks and their probabilities could affect your project. Based on these risks, what should you contingency reserve be? Risk 1: 50% chance of a weather delay costing $5,000Risk 2: 20% chance of a worker strike costing $10,000Risk 3: 10% chance of catastrophic failure costing $50,000
An investor has a certain amount of money available to invest now. Three alternative investments are available. The estimated profits, in Kwacha, of each investment under each economic condition are indicated in the following payoff table: Event Investment selection A B C Economy declines 500 -2000 -7000 No charge 1000 2000 -1000 Economy Expand 2000 5000 20,000 Based on his own past experience, the investor assigns the following probabilities to each economic condition: P (Economy declines) = 30 P (No Change) = 0.50 P (Economy expands) = 0.20 Determine the optimal action based on the maximax criterion Determine the optimal action based on the maximin criterion iii. Compute the expected monetary value (EMV) for each investment
A new product has the following profit projections and associated probabilities: Profit Probability $150,000 .10 $100,000 .25 $50,000 .20 $0 .15 -$50,00 .20 -$100,000 .10 a) use the expected value approach to decide whether to market the new product b) because of the high dollar values involved, especially the possibility of a $100,000 loss, the marketing vice president has expressed some concern about the use of the expected value approach. As a consequence, if a utility analysis is performed, what is the appropriate lottery? c) assume that the following indifference probabilities are assigned. Profit indifference Probability (p) $100,000 .95 $50,000 .70 $0 .50…

Recommended textbooks for you

MATLAB: An Introduction with Applications

Statistics

ISBN:

9781119256830

Author:

Amos Gilat

Publisher:

John Wiley & Sons Inc

Probability and Statistics for Engineering and th…

Statistics

ISBN:

9781305251809

Author:

Jay L. Devore

Publisher:

Cengage Learning

Statistics for The Behavioral Sciences (MindTap C…

Statistics

ISBN:

9781305504912

Author:

Frederick J Gravetter, Larry B. Wallnau

Publisher:

Cengage Learning

MATLAB: An Introduction with Applications

Statistics

ISBN:

9781119256830

Author:

Amos Gilat

Publisher:

John Wiley & Sons Inc

Probability and Statistics for Engineering and th…

Statistics

ISBN:

9781305251809

Author:

Jay L. Devore

Publisher:

Cengage Learning

Statistics for The Behavioral Sciences (MindTap C…

Statistics

ISBN:

9781305504912

Author:

Frederick J Gravetter, Larry B. Wallnau

Publisher:

Cengage Learning

Elementary Statistics: Picturing the World (7th E…

Statistics

ISBN:

9780134683416

Author:

Ron Larson, Betsy Farber

Publisher:

PEARSON

The Basic Practice of Statistics

Statistics

ISBN:

9781319042578

Author:

David S. Moore, William I. Notz, Michael A. Fligner

Publisher:

W. H. Freeman

Introduction to the Practice of Statistics

Statistics

ISBN:

9781319013387

Author:

David S. Moore, George P. McCabe, Bruce A. Craig

Publisher:

W. H. Freeman

SEE MORE TEXTBOOKS