2/cfi/120!/4/4@O.00:52.9100 with a favorable market is too high. Howmuch lower would this figure have to be for Kento change his decision made in part b?Mickey Lawson is considering investing some3-20money that he inherited. The following payoff tablegives the profits that would be realized during thenext year for each of three investment alternativesMickey is considering:# 3-STATE OF NATUREPOORGOODDECISIONALTERNATIVEECONOMYECONOMY-20,00020,00023,0000.580,000Stock market30,000Bonds23,000CDsProbability0.5(a) What decision would maximize expected profits?(b) What is the maximum amount that should bepaid for a perfect forecast of the economy?:3-21 Develop an opportunity loss table for the investmentproblem that Mickey Lawson faces in Problem 3-20.What decision would minimize the expected oppor-tunity loss? What is the minimum EOL?

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Asked Oct 25, 2019
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question 3-20

2/cfi/120!/4/4@O.00:52.9
100 with a favorable market is too high. How
much lower would this figure have to be for Ken
to change his decision made in part b?
Mickey Lawson is considering investing some
3-20
money that he inherited. The following payoff table
gives the profits that would be realized during the
next year for each of three investment alternatives
Mickey is considering:
# 3-
STATE OF NATURE
POOR
GOOD
DECISION
ALTERNATIVE
ECONOMY
ECONOMY
-20,000
20,000
23,000
0.5
80,000
Stock market
30,000
Bonds
23,000
CDs
Probability
0.5
(a) What decision would maximize expected profits?
(b) What is the maximum amount that should be
paid for a perfect forecast of the economy?
:3-21 Develop an opportunity loss table for the investment
problem that Mickey Lawson faces in Problem 3-20.
What decision would minimize the expected oppor-
tunity loss? What is the minimum EOL?
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2/cfi/120!/4/4@O.00:52.9 100 with a favorable market is too high. How much lower would this figure have to be for Ken to change his decision made in part b? Mickey Lawson is considering investing some 3-20 money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of three investment alternatives Mickey is considering: # 3- STATE OF NATURE POOR GOOD DECISION ALTERNATIVE ECONOMY ECONOMY -20,000 20,000 23,000 0.5 80,000 Stock market 30,000 Bonds 23,000 CDs Probability 0.5 (a) What decision would maximize expected profits? (b) What is the maximum amount that should be paid for a perfect forecast of the economy? :3-21 Develop an opportunity loss table for the investment problem that Mickey Lawson faces in Problem 3-20. What decision would minimize the expected oppor- tunity loss? What is the minimum EOL?

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Expert Answer

Step 1

Given data

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State of Nature Decision Alternative Good Economy Poor Economy Stock Market 80,000 -20,000 Bonds 30,000 23,000 20,000 CDs 23,000 Probability 0.5 O,5 а) Here we will use the concept of Expected Monetary Value (EMV) It is calculated by the formula п Σ М,Р. ЕMV i=1 EMVstock Market 80000 x 0.5 - 20000 x 0.5 30000 EMVBonds 30000 x 0.5 + 20000 x 0.5 = 25000 EMVDs = 23000 x 0.5 + 23000 x 0.5 = 23000 Expected profit is higher for the stock market, so he should invest in stock market.

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Step 2

b)

Best way is to invest in stock market with payoff of 80000 and invest in CDs with a...

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EMVwith perfect information 80000 x 0.5 +23000 x 0.5 51500 Maximum Expected value without perfect information is given by 80000 x 0.5 - 20000 x 0.5 = 30000 Max EMVwithout perfect information EVPI = EMVwith perfect information Max EMVwithout perfect information =>51500 30000 = 21500 He should pay 21500 for perfect forecast of the economy

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