are based on the in r is considering 4 investments, A, B, C, D. The payoff from
ID: 425708 • Letter: A
Question
are based on the in r is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economie climate over the next 2 years. The or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining e economy at 60%. nomy at 40% and an expanding Inv estment Economy Payoff E06 30 D04 E06 D04 D04 E06 30 D0450 E Expanding Economy D Decining Economy Refer to Exhibit 14.5 What is the correct decision for this investor based on an expected monetary value criterion? a. A b. B d.?Explanation / Answer
option A pay off is= 0.6*30+0.4*20= 18+8= 26
option B payoff is= 0.6*30+0.4*40= 18+16= 34
option C payoff is= 0.6*40+0.4*20= 24+8= 32
option D payoff is= 0.6*30+0.4*50= 18+20= 38
option D is the best alternative among these 4 which carries higher payoff than remaining 3 alternatives.
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