After reading about economic predictions, Debbie Gibson has assigned the probabi
ID: 409005 • Letter: A
Question
After reading about economic predictions, Debbie Gibson has assigned the probability that the economy will be strong, average, and weak at 0.2, 0.35, and 0.45, respectively. a) Using EMVs, what option dhould Debbiechoose? What is the maximum EMV? b) Using EOL, what option should Debbie choose? What is the minimum EOL? c) Compute the EVPI and show that it is the sameas the minimum EOL. Here is the INVESTMENT table (so you see & understand what I am asking) <strong/average/weak> with STOCKS it is 12%/6%/-10%. WIth BONDS it is 7%/4%/1% and with MONEY MARKET it is 4%/3%/2%.
Explanation / Answer
a) Using EMVs, what option dhould Debbiechoose? What is the maximum EMV?
economy strong 0.2
economy average 0.35
economy weak 0.45
Maximum EMV =Stocks Strong combination
b) Using EOL, what option should Debbie choose? What is the minimum EOL
Minimum EOL = Bond Weak 0.55
c) Compute the EVPI and show that it is the sameas the minimum EOL.
Strong Average Weak Stocks 12% 6% 10% Bond 7% 4% 1% Money Market 4% 3% 2%