Question

Chapter 9 homework Home insert X Out Page Layout Formulas Carbon - 14 Data Review View LG әр Test General Format UPM Merge Center $ % ) u p-to-cane with security omce Update To X over, choose Check for Update 4. Warren Buffy is an enormously wealthy investor who has built his fortune through his legendary mesting acumen. He currently has been offered three major investments and he would like to choose one. The first one is a conservative investment that would perform very well in an improving economy and only suffer a small loss in a worsening economy. The second is a speculative Investment that would perform extremely well in an improving economy but would do very badly in a worsening economy. The third is a countereyclical investment that would lose some money in an improving economy but would perform well in a woning economy Warren believes that there are three possible scenarios over the lives of these potential investments: (l) an improving economy (2) a stable economy, and (3) a worsening economy. He is pessimistic about where the economy is headed, and so has assigned prior probabilitia of 0.1, 0.5 and 0.4, respectively, to these three scenarios. He also estimates that his profits under these respective scenarios are those given by the following table. Which investment is Warren most likely to choose une the EMV? Which investment is Warren mostly to choose to minimize his EOLS? Calculate the EVP1 OUR ANSWERS MacBook Air

Answer 1

1. EMV(Expected Monetary Value )

EMV of:

Conservative Investment=(30*0.1)+(5*0.5)-(10*0.4)=1.5

Specualtive investment=(40*0.1)+(10*0.5)-(30*0.4)= -3

Countercyclical investment=(-10*0.1)+(0*0.5)+(15*0.4)= 5

Going by the above calculations,

Warren is most likely to choose

Countercyclical investment that returns maximum EMV of profits

2.EOLS (Expected Opportunity Loss)

EOL for

Conservative Investment=-3+5=2

Specualtive investment=1.5+5=6.5

Countercyclical investment=1.5-3=-1.5

Going by the above calculations,

Warren is most likely to choose

Countercyclical investment that returns minimum opportunity loss value (regret value) , in choosing it , over the other 2 investments.

3.EVPI(Expected Value of Perfect Information)

Maximum probable profits -Maximum EMV as calculated in 1

((40*0.1)+(5*0.5)+(15*0.4))-5=

7.5