A game of chance offers the following odds and payoffs. Each play of the game costs $125, so the net profit per play is the payoff less $125. Probability 0.20 0.40 0.40 Payoff $500 200 0 Net Profit $375 75 -125 a-1. What is the expected cash payoff? Note: Round your answer to the nearest whole dollar amount. a-2. What is the expected rate of return? Note: Enter your answer as a percent rounded to the nearest whole number. b-1. What is the variance of the expected returns? Note: In the calculation, use the percentage values, not the decimal values for the rates of return. Do not round intermediate calculations. Round your answer to the nearest whole number. b-2. What is the standard deviation of the expected returns? Note: Enter your answer as a percent rounded to 2 decimal places. a-1. Expected cash payoff a-2. Expected rate of return b-1. Variance b-2. Standard deviation % %

A game of chance offers the following odds and payoffs. Each play of the game costs $125, so the net profit per play is the payoff less $125. Probability 0.20 0.40 0.40 Payoff $500 200 0 Net Profit $375 75 -125 a-1. What is the expected cash payoff? Note: Round your answer to the nearest whole dollar amount. a-2. What is the expected rate of return? Note: Enter your answer as a percent rounded to the nearest whole number. b-1. What is the variance of the expected returns? Note: In the calculation, use the percentage values, not the decimal values for the rates of return. Do not round intermediate calculations. Round your answer to the nearest whole number. b-2. What is the standard deviation of the expected returns? Note: Enter your answer as a percent rounded to 2 decimal places. a-1. Expected cash payoff a-2. Expected rate of return b-1. Variance b-2. Standard deviation % %

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 19P: A firm has three investment alternatives. Payoffs are in thousands of dollars. a. Using the expected...

See similar textbooks

Similar questions

A game of chance offers the following odds and payoffs. Each play of the game costs $200, so the net profit per play is the payoff less $200. Probability Payoff Net Profit 0.10 $700 $500 0.50 300 100 0.40 0 –200 a-1. What is the expected cash payoff? (Round your answer to the nearest whole dollar amount.) a-2. What is the expected rate of return? (Enter your answer as a percent rounded to the nearest whole number.) b-1. What is the variance of the expected returns? (In the calculation, use the percentage values, not the decimal values for the rates of return. Do not round intermediate calculations. Round your answer to the nearest whole number.) b-2. What is the standard deviation of the expected returns? (Enter your answer as a percent rounded to 2 decimal places.)
Suppose you won the lottery and had two options: (1) receiving $0.8 million or (2) taking a gamble in which, at the flip of a coin, you receive $1.6 million if a head comes up but receive zero if a tail comes up. What is the expected value of the gamble? Enter your answer in millions. For example, an answer of $500,000 should be entered as 0.5. Round your answer to one decimal place. $ million Would you take the sure $0.8 million or the gamble? If you chose the sure $0.8 million, would that indicate that you are a risk averter or a risk seeker? Suppose the payoff was actually $0.8 million - that was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $856,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,920,000 at the end of the year. The expected profit on the T-bond investment is $56,000. What is the expected dollar profit on the stock investment? Round your answer to the nearest…
A firm has three investment alternatives. Payoffs are in thousands of dollars. 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. c. Why dont decision makers A and B select the same decision alternative?
Suppose you won the lottery and had two options: (1) receiving$0.5 million or (2) taking a gamble in which, at the flip of a coin, you receive $1 million if ahead comes up but receive zero if a tail comes up.a. What is the expected value of the gamble?b. Would you take the sure $0.5 million or the gamble?c. If you chose the sure $0.5 million, would that indicate that you are a risk averter or arisk seeker?d. Suppose the payoff was actually $0.5 million—that was the only choice. You nowface the choice of investing it in a U.S. Treasury bond that will return $537,500 at theend of a year or a common stock that has a 50–50 chance of being worthless or worth$1,150,000 at the end of the year. 1. The expected profit on the T-bond investment is $37,500. What is the expected dollarprofit on the stock investment?2. The expected rate of return on the T-bond investment is 7.5%. What is the expectedrate of return on the stock investment?3. Would you invest in the bond or the stock? Why?4. Exactly…
Suppose money invested in a hedge fund earns 1% per trading day. There are 250 trading days per year. What will be your annual return on $100 invested in the fund if the manager allows you to reinvest in the fund the 1% you earn each day? *Make sure to input all currency answers without any currency symbols or commas, and use two decimal places of precision.
What amount of money would you need to receive for sure to be indifferent between that amount of money and a gamble that pays either $0 or $100,000 each with a 50% chance? What does your answer imply about whether you are risk averse, risk neutral, or risk seeking (i.e., preferring a risk over its EV)? What amount would have made you indifferent if I asked you this question when you were 25 years old? Reflect on whether your risk aversion has changed over time. Consider why it has changed or why it has not changed (e.g., due to your financial situation, your maturity, both, neither).
Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF) with a 11% expected return and a 20% volatility. What is your expected return on your investment?
Consider when you decide to invest 40% of your money in risky portfolio P( with the expected return of 25% and standard deviation of 20%) and invest 60% of your money into a treasury bill) the rate of the TBill is 5%). Assume that in thi s investment you use all the money you have on your own without borrowing from outside. What's the sharp ratio? 0.670? 1.000? 1.625? 0.400?
If the return on the risk-free asset is 2.25% (Rf = 2.25%) and the market return is 6.50% (Rm = 6.50%), what is the beta of Bank of America, BAC, if it has had a return of 9.14%? You must show all counts.
Suppose you have $275,000 in cash, and you decide to borrow another $33,000 at a 4% interest rate to invest in the stock market. You invest the entire $308,000 in a portfolio J with a 15% expected return and a 22% volatility. a. What is the expected return and volatility (standard deviation) of your investment? b. What is your realized return if J goes up 32% over the year? c. What return do you realize if J falls by 25% over the year?
An organization is presented with a choice of two investment options. Option A has a 60% chance of making a profit of ₱300,000 and a 40% chance of incurring a loss of $500,000. Option B has a 70% chance of making a profit of ₱200,000 and a 30% chance of incurring a loss of ₱250,000. What is the expected profit/loss for Option A? (Put parenthesis if negative What is the expected profit/loss for Option B? (Put parenthesis if negative)
Consider a decision maker who is comfortable with an investment decision that has a 50% chance of earning $25,000 and a 50% chance of losing $12,500, but not with any larger investments that have the same relative payoffs. Write the equation for the exponential function that approximates this decision maker’s utility function. Plot the exponential utility function for this decision maker for x values between –20,000 and 35,000. Is this decision maker risk-seeking, risk-neutral, or risk-averse? Suppose the decision maker decides that she would actually be willing to make an investment that has a 50% chance of earning $30,000 and a 50% chance of losing $15,000. Plot the exponential function that approximates this utility function and compare it to the utility function from part (b). Is the decision maker becoming more risk-seeking or more risk-averse?