Yalena Yale has always been proud of her personal investment strategies and has done very well over the past several years. Yalena invests primarily in the stock market. Over the past couple of months due to COVID-19, Yalena has become very concerned about the stock market as a good investment. In some cases, it would have been better for her to have her money in a bank than in the market. During the next few months, she must decide whether to invest her savings of $100,000 in the stock market (hoping that the market will bounce back) or in a certificate of bank deposit (CD) at an annual interest rate of 9%. If the market is good, Yalena believes that he could get a 14% return on her money. With a fair market, she expects to get a 9% return. If the market is bad, she will most likely get no return at all, in other words, the return would be 0%. Since her retirement age approaches fast, Yalena is considering the possibility of using Bloomberg Marketing Research (BMR) to gather additional information about the stock market. The research will cost $2,000, and it could turn out to be accurate (probability 80%) or inaccurate. The probability of an accurate research, and either a good or fair market is 0.6 and 0.35, respectively. The probability of an inaccurate research and either a good or a fair market is 0.7 and 0.2, respectively. Yalena is not sure if the value of the BMR research is worth the cost. Yalena has estimated that the probability of either the good or fair market to be 0.45 and 0.4 respectively without the BRM research. a. What should the company do? What is the EMV of the decision? b. What is a fair value for the BRM research?
Yalena Yale has always been proud of her personal investment strategies and has done very well over the past several years. Yalena invests primarily in the stock market. Over the past couple of months due to COVID-19, Yalena has become very concerned about the stock market as a good investment. In some cases, it would have been better for her to have her money in a bank than in the market. During the next few months, she must decide whether to invest her savings of $100,000 in the stock market (hoping that the market will bounce back) or in a certificate of bank deposit (CD) at an annual interest rate of 9%. If the market is good, Yalena believes that he could get a 14% return on her money. With a fair market, she expects to get a 9% return. If the market is bad, she will most likely get no return at all, in other words, the return would be 0%. Since her retirement age approaches fast, Yalena is considering the possibility of using Bloomberg Marketing Research (BMR) to gather additional information about the stock market. The research will cost $2,000, and it could turn out to be accurate (probability 80%) or inaccurate. The probability of an accurate research, and either a good or fair market is 0.6 and 0.35, respectively. The probability of an inaccurate research and either a good or a fair market is 0.7 and 0.2, respectively. Yalena is not sure if the value of the BMR research is worth the cost. Yalena has estimated that the probability of either the good or fair market to be 0.45 and 0.4 respectively without the BRM research. a. What should the company do? What is the EMV of the decision? b. What is a fair value for the BRM research?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter11: Simulation Models
Section: Chapter Questions
Problem 58P: Suppose you begin year 1 with 5000. At the beginning of each year, you put half of your money under...
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Transcribed Image Text:Yalena Yale has always been proud of her personal investment strategies and has done very well over
the past several years. Yalena invests primarily in the stock market. Over the past couple of months due
to COVID-19, Yalena has become very concerned about the stock market as a good investment. In
some cases, it would have been better for her to have her money in a bank than in the market. During
the next few months, she must decide whether to invest her savings of $100,000 in the stock market
(hoping that the market will bounce back) or in a certificate of bank deposit (CD) at an annual interest
rate of 9%. If the market is good, Yalena believes that he could get a 14% return on her money. With a
fair market, she expects to get a 9% return. If the market is bad, she will most likely get no return at all,
in other words, the return would be 0%.
Since her retirement age approaches fast, Yalena is considering the possibility of using Bloomberg
Marketing Research (BMR) to gather additional information about the stock market. The research will
cost $2,000, and it could turn out to be accurate (probability 80%) or inaccurate. The probability of an
accurate research, and either a good or fair market is 0.6 and 0.35, respectively. The probability of an
inaccurate research and either a good or a fair market is 0.7 and 0.2, respectively. Yalena is not sure if
the value of the BMR research is worth the cost. Yalena has estimated that the probability of either the
good or fair market to be 0.45 and 0.4 respectively without the BRM research.
What should the company do? What is the EMV of the decision?
b. What is a fair value for the BRM research?
a.
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