Question

1. Maria is considering to invest some money that she has inherited from her grandma. The following table gives you with the information regarding the profits of her three different investing alternatives. Based on the table below please answer the following questions:

1. What decision would maximize expected profits?
2. What is the maximum amount that should be paid for a perfect forecast of the economy?  

Decision Alternative	Good Economy	Poor Economy
Stock market	80000	-20000
Bonds	30000	20000
CDs	23000	23000
Probability	0.5	0.5

Answer 1

(a) Expected profit
Stock market: 80000 * 0.5 + (-20000) * 0.5 = $30000
Bonds: 30000 * 0.5 + 20000 * 0.5 = $25000
CDs: 23000 * 0.5 + 23000 * 0.5 = $23000
Decision: Stock market

(b) Opportunity loss table:
	Decision alternatives
States of nature	Probability	Stock market	Bonds	CDs
Good economy	0.5	0	50000	57000
Poor economy	0.5	43000	3000	0

EOL for Stock market = 0.5 * 0 + 0.5 * 43000 = $21500
EOL for Bonds = 0.5 * 50000 + 0.5 * 3000 = $26500
EOL for CDs = 0.5 * 57000 + 0.5 * 0 = $28500
Decision: Stock market

EVPI = EOL = $21500