Your company needs to make an important decision thatinvolves large monetary consequences. You have listedall of the possible outcomes and the monetary payoffsand costs from all outcomes and all potential decisions.You want to use the EMV criterion, but you realize thatthis requires probabilities and you see no way to findthe required probabilities. What can you do?

Your company needs to make an important decision thatinvolves large monetary consequences. You have listedall of the possible outcomes and the monetary payoffsand costs from all outcomes and all potential decisions.You want to use the EMV criterion, but you realize thatthis requires probabilities and you see no way to findthe required probabilities. What can you do?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 67P

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A European put option allows an investor to sell a share of stock at the exercise price on the exercise data. For example, if the exercise price is 48, and the stock price is 45 on the exercise date, the investor can sell the stock for 48 and then immediately buy it back (that is, cover his position) for 45, making 3 profit. But if the stock price on the exercise date is greater than the exercise price, the option is worthless at that date. So for a put, the investor is hoping that the price of the stock decreases. Using the same parameters as in Example 11.7, find a fair price for a European put option. (Note: As discussed in the text, an actual put option is usually for 100 shares.)
#17FAVORABLE UNFAVORABLEMARKET MARKETEQUIPMENT ( $) ($)Sub 100 300,000 –200,000Oiler J 250,000 –100,000Texan 75,000 –18,000For example, if Ken purchases a Sub 100 and ifthere is a favorable market, he will realize a profitof $300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of $200,000. ButKen has always been a very optimistic decisionmaker.(a) What type of decision is Ken facing?(b) What decision criterion should he use?(c) What alternative is best? #18Although Ken Brown (discussed in Problem 3-17) is the principal owner of Brown Oil, his brother Bob iscredited with making the company a financial success. Bob is vice president of finance. Bob attributeshis success to his pessimistic attitude about business and the oil industry. Given the information fromProblem 3-17, it is likely that Bob will arrive at a different decision. What decision criterion should Bobuse, and what alternative…
2. Using the following table, perform ALL FIVE of the techniques for decision-making under Uncertainty: Maximax, Maximin, Hurwicz Realism (α = 0.7), LaPlace, and Minimax Regret. Show the work on an Excel File. PROFIT ($) STRONG MARKET FAIR MARKET POOR MARKET Large facility 550,000 110,000 -310,000 Medium-sized facility 300,000 129,000 -100,000 Small facility 200,000 100,000 -32,000 No facility 0 0 0
Using Excel Spreadsheet and formulas for this problem (make sure cell references are unique to your table). Provide all techniques practiced previously: five (5) techniques for Decisions Making under Uncertainty, EMV, EOL, and EVPI. Use α = 0.7 for the Hurwicz. Use the .50 for the probability of a Good Economy and .50 for the probability of a Poor Economy. Show the work on an Excel file. STATE OF NATURE DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY Sotck market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000
Suppose that you want to invest $10,000 in the stock market by buying shares in one of two companies: A and B. Shares in company A though risky, could yield a 50% return on investment during the next year. If the stock market if conditions are not favorable (bear market) the stock may lose 20% of it value. Company B provides safe investments with 15% return in a bull market and only 5% in a bear market Ali the applications you have consulted are predicting a 60% chance for a bull market and 40% for a bear market. Where you invest your money? Construct a decision tree.
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Further, by applying relevant managerial principles (which you should mention here) to surmount this conflict show why it would be rational to invest in other investment options other than building flats to resolve this investment choice problem you are confronted with? What principle would be relevant to the understanding of variation of factors of investment in the SR and LR?
Bilbo Baggins wants to save money to meet threeobjectives. First, he would like to be able to retire 30 years from now with a retirementincome of $23,000 per month for 20 years, with the first payment received 30 yearsand 1 month from now. Second, he would like to purchase a cabin in Rivendell in10 years at an estimated cost of $320,000. Third, after he passes on at the end of the20 years of withdrawals, he would like to leave an inheritance of $1,000,000 to hisnephew Frodo. He can afford to save $2,100 per month for the next 10 years. If hecan earn an 11 percent EAR before he retires and an 8 percent EAR after he retires,how much will he have to save each month in Years 11 through 30?
Use the table below to answer the questions that follow and caculate the Expected Monetary Value(EMV) of the different outcomesDECISION TABLE WITH CONDITIONAL VALUESSTATE OF NATUREFAVORABLE OUTCOME UNFAVORABLE OUTCOMEALTERNATIVES ($) ($)Start a big Company 2,000,000 -500,000Start a small company 800,000 -200,000Build Nothing 0 0Probabilities 0.3 0.7Calculate the following The EMV Maximin criterion Maximax criterion Minimax criterion
Using the following table, perform ALL FIVE of the techniques for Decision Making under Uncertainty: Maximax, Maximin, Hurwicz Realism (α = 0.7), LaPlace and Minimax Regret. Use the .50 for the probability of a Good Economy and .50 for the probability of a Poor Economy. You must show your work. STATE OF NATURE DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY Sotck market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000
An investor is considering investing in stocks, real estate, or bonds economic conditions. Suppose that the probabilities for good, stable and poor conditions are 0.2, 0.4 and … (figure it out), respectively. Table 1 shows the payoff returns for the investor’s decision situation. Table 1: Investment returns Economic Conditions Investment Good Stable Poor Stocks R5 000 R7 000 R3 000 Real estate -R2 000 R10 000 R6 000 Bonds R4 000 R4 000 R4 000 Assuming the probabilities of the occurrence of the state of nature are unknown, what will be the best investment alternative; a) If the decision maker is pessimistic about the future state, (3) b) If the decision maker strikes a compromise between the maximin and maximax, assuming the coefficient of pessimism is 0.2. (4) c) If the decision is based on opportunistic loss. (6) d) If we use the equally likelihood criterion