An investor with $10,000 available to invest has the following options: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rate of return; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or 10%; or (3) he can invest in a more risky stock, where the possible annual rates of return are 1%, 9%, or 17%. The investor can place all of his available funds in any one of these options, or he can split his $10,000 into two $5000 investments in any two of these options. The joint probability distribution of the possible return rates for the two stocks is given in the file P09_34.xlsx. a. Use PrecisionTree to identify the strategy that maximizes the investor’s expected one-year earnings. b. Perform a sensitivity analysis on the optimal decision, letting the amount available to invest and the risk-free return both vary, one at a time, plus or minus 100% from their base values, and summarize your findings.

BuyFind

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659
BuyFind

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

Solutions

Chapter
Section
Chapter 9, Problem 34P
Textbook Problem

An investor with $10,000 available to invest has the following options: (1) he can invest in a risk-free savings account with a guaranteed 3% annual rate of return; (2) he can invest in a fairly safe stock, where the possible annual rates of return are 6%, 8%, or 10%; or (3) he can invest in a more risky stock, where the possible annual rates of return are 1%, 9%, or 17%. The investor can place all of his available funds in any one of these options, or he can split his $10,000 into two $5000 investments in any two of these options. The joint probability distribution of the possible return rates for the two stocks is given in the file P09_34.xlsx.

  1. a. Use PrecisionTree to identify the strategy that maximizes the investor’s expected one-year earnings.
  2. b. Perform a sensitivity analysis on the optimal decision, letting the amount available to invest and the risk-free return both vary, one at a time, plus or minus 100% from their base values, and summarize your findings.

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Chapter 9 Solutions

Practical Management Science
Ch. 9.5 - In Example 9.2, Acmes probability of technological...Ch. 9.5 - In Example 9.2, the fixed costs are split 4...Ch. 9.5 - In Example 9.2, use a two-way PrecisionTree...Ch. 9.5 - Starting with the finished version of the file for...Ch. 9.5 - Starting with the finished version of the file for...Ch. 9.5 - Suppose you are tested to see if you have a rare...Ch. 9.5 - In Example 9.2, a technological failure implies...Ch. 9.5 - The model in Example 9.3 has only two market...Ch. 9.6 - Using the finished version of the file for Example...Ch. 9.6 - You saw in Example 9.4 how Acme prefers to abandon...Ch. 9.6 - Starting with the finished version of Example 9.2,...Ch. 9 - The SweetTooth Candy Company knows it will need 10...Ch. 9 - Carlisle Tire and Rubber, Inc., is considering...Ch. 9 - A local energy provider offers a landowner 180,000...Ch. 9 - An investor with 10,000 available to invest has...Ch. 9 - Two construction companies are bidding against one...Ch. 9 - You have sued your employer for damages suffered...Ch. 9 - Consider a population of 3000 people, 1400 of whom...Ch. 9 - Yearly automobile inspections are required for...Ch. 9 - Ford is going to produce a new vehicle, the...Ch. 9 - A nuclear power company is deciding whether to...Ch. 9 - The Indiana University basketball team trails by...Ch. 9 - Your company needs to make an important decision...Ch. 9 - If your company makes a particular decision in the...Ch. 9 - In the previous question, suppose you have the...Ch. 9 - In a classic oil-drilling example, you are trying...Ch. 9 - Your company has signed a contract with a good...Ch. 9 - You must make one of two decisions, each with...Ch. 9 - A potentially huge hurricane is forming in the...Ch. 9 - It seems obvious that if you can purchase...Ch. 9 - Insurance companies wouldnt exist unless customers...Ch. 9 - You often hear about the trade-off between risk...Ch. 9 - Can you ever use the material in this chapter to...

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