Question

QUESTION 28

1. You would like to invest in one of the three available investment plans: money market, bonds, or stocks. The payoffs (profits) of each plan under two possible future economic conditions, PE (poor economy) and GE (good economy), are shown below. The probability of the occurrence of PE is 0.2.

   PE GE

   Money Market 1000 2000

   Bonds 3000 2500

   Stocks 2000 4500

   The expected value of perfect information (EVPI) is

   	a.	150
   	b.	200
   	c.	320
   	d.	450
   	e.	None of the above

QUESTION 33

1. Which is the recommend decision alternative using the minimax regret approach?

   Use the following payoff table for a  maximization problem.

   Decision Alternative	State of nature 1	State of nature 2
   D1	6	7
   D2	–2	2
   D3	2	–3
   D4	10	4

   	a.	D1
   	b.	D2
   	c.	D3
   	d.	D4
   	e.	None of the above

Answer all questions

Answer 1

28)

expected value without information =max(EV(money market),EV(Bonds),EV(stocks))

=max(1000*0.2+2000*0.8+3000*0.2+2500*0.8+2000*0.2+4500*0.8)=max(1800 , 2600, 4000) =4000

expected value with perfect information=0.2*3000+0.8*4500=4200

The expected value of perfect information (EVPI) is 4200-4000 =200

option B is correct

33)

minimax regret table

decision	S1	S2
D1	4	0
D2	12	5
D3	8	10
D4	0	3

from above minimum of maximum regret is in D4 decision

therefore one should choose D4

option d (D4)