Maximum Equal likelihood Expected value Create a sensitivity graph comparing the
ID: 2368117 • Letter: M
Question
Maximum Equal likelihood Expected value Create a sensitivity graph comparing the different alternatives as the probability of success changes. John has to determine which stock he should invert in: stock A or stock B. The economic conditions, good and poor, will determine the profit and loss from his investment. Construct an Excel spreadsheet to compute the expected value for each decision and select the best one. Using the spreadsheet find the best decisions for the following: Maximal Maximin Equal likelihood Expected value What does the probability of good have to be to make the two decisions equally attractive with regard to expected value?Explanation / Answer
a. Stock B
b. Stock A
c. Stock B
d. Stock A
e. (x)(12,000) + (y)(-3,000) = (x)(3,500) + (y)(3000)
12,000x - 3500x = 3000y + 3000y
8500x = 6000y
x = .705y
Therefore, the probability of "good" (indicated by variable x) needs to be .705 * the probability of y, but the also need to equal 1
.705y + y = 1
1.705y = 1
y = .5865
x = .4135 These are your probabilities. You may want to round.