Expected Value, Quanitative Analysis
Not what you're looking for?
5. You have received your MBA from Trinity University and been hired by a Fortune 500 company as the Executive Vice President of Finance. You are faced with three investment alternatives with the following payoffs (thousands of dollars).
Economic Conditions
Decision Alternative Up(s1) Stable(s2) Down(s3)
Investment A(d1) 100 25 0
Investment B(d2) 75 50 25
Investment C(d3) 50 50 50
Probabilities 0.40 0.30 0.30
a. Using the expected value approach, which decision is preferred?
b. For the lottery having a payoff of $100,000 with probability p and $0 with probability (1-p), two decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach.
Indifference Probability (p)
Profit Decision Maker A Decision Maker B
$75,000 0.80 0.60
$50,000 0.60 0.30
$25,000 0.30 0.15
Purchase this Solution
Solution Summary
This solution explains how to use the expected value approach.
Solution Preview
Part a)
Expected Value = Summation of (Probability of event i * Payoffs under Event i)
Expected value of Investment A(d1) = 0.4*100+0.3*25+0.3*0= 47.50
Expected value of Investment B(d2) =0.4*75+0.30*50+0.30*25 =52.50
Expected value of Investment C(d3) =0.4*50+0.30*50+0.30*50= 50.00
Since Expected value is highest for Investment B (d2), the Investment B is preferred.
Note above figures are in thousands.
b. For the lottery having a payoff of $100,000 with probability p and $0 with ...
Purchase this Solution
Free BrainMass Quizzes
Basics of corporate finance
These questions will test you on your knowledge of finance.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.