Chapter 20, Problem 21PS

In Problem 20.14. an investor is trying to determine the optimal investment decision among three investment opportunities. Prior to making his investment decision. the investor decides to consult with his �nancial adviser. In the past. when the economy has declined. the �nancial adviser has given a rosy forecast $20\%$ of the time (with a gloomy forecast $80\%$ of the time). When there has been no change in the economy. the �nancial adviser has given a rosy forecast $40\%$ of the time. When there has been an expanding economy. the �nancial adviser has given a rosy forecast $70\%$ of the time. The �nancial adviser in this case gives a gloomy forecast for the economy.

a. Revise the probabilities of the investor based on this economic forecast by the �nancial adviser.

b. Use these revised probabilities to repeat Problem 20.14.

c. Compare the results in (b) to those in Problem 20.14.