QUESTION B2 A financial Analyst wants to evaluate the feasibility of his investment options. The following payoff table shows the profit ($Million) of each investment option under various future economic environments: Payoff (profit) table Economic environment Investment option Good Fair Poor X 25 8 -15 Y 20 15 -10 18 5 10 According to expert's predictions the probability of the economic environments are as below: 0.40 for good economic environment, 0.50 for fair economic environment, and 0.10 for poor economic environment. swer all the questions ow by showing your workings where necessary. (a) Determine the best instment option using the following decision approach. (1) Маximin (ii) Ma imax Answer B and C Hurwicz: when coefficienm ntimism a = 0.4 (iv) ithout further calculation, what would be tun ision for the cases: a =1 and a = (b) By using the payoff table above, construct an opportunity loss (regret) table. Determine the best option by using Minimax regret approach. Determine the best portfolio by using Expected Opportunity Loss approach. (c) Determine the portfolio which will give the best expected profits. Without further calculation, write down the expected value of perfect information (EVPI). Interpret the meaning of EVPI.
QUESTION B2 A financial Analyst wants to evaluate the feasibility of his investment options. The following payoff table shows the profit ($Million) of each investment option under various future economic environments: Payoff (profit) table Economic environment Investment option Good Fair Poor X 25 8 -15 Y 20 15 -10 18 5 10 According to expert's predictions the probability of the economic environments are as below: 0.40 for good economic environment, 0.50 for fair economic environment, and 0.10 for poor economic environment. swer all the questions ow by showing your workings where necessary. (a) Determine the best instment option using the following decision approach. (1) Маximin (ii) Ma imax Answer B and C Hurwicz: when coefficienm ntimism a = 0.4 (iv) ithout further calculation, what would be tun ision for the cases: a =1 and a = (b) By using the payoff table above, construct an opportunity loss (regret) table. Determine the best option by using Minimax regret approach. Determine the best portfolio by using Expected Opportunity Loss approach. (c) Determine the portfolio which will give the best expected profits. Without further calculation, write down the expected value of perfect information (EVPI). Interpret the meaning of EVPI.
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
Related questions
Question
A4
Answer b&c
Transcribed Image Text:QUESTION B2
A financial Analyst wants to evaluate the feasibility of his investment options. The following
payoff table shows the profit ($Million) of each investment option under various future
economic environments:
Payoff (profit) table
Economic environment
Investment option
Good
Fair
Poor
25
8
-15
Y
20
15
-10
18
5
10
According to expert's predictions the probability of the economic environments are as below:
0.40 for good economic environment, 0.50 for fair economic environment, and 0.10 for poor
economic environment.
swer all the questions ow by showing your workings where necessary.
(а)
Determine the best instment option using the following decision approach.
Мaximin
(ii)
Mimax
Answer B and C
Hurwicz: when coefficien antimism a = 0.4
(iv)
ithout further calculation, what would be tne
sision for the cases: a = 1 and
(b)
By using the payoff table above, construct an opportunity loss (regret) table.
Determine the best option by using Minimax regret approach.
Determine the best portfolio by using Expected Opportunity Loss approach.
(c)
Determine the portfolio which will give the best expected profits.
Without further calculation, write down the expected value of perfect information
(EVPI). Interpret the meaning of EVPI.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 6 images
Recommended textbooks for you
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Purchasing and Supply Chain Management
Operations Management
ISBN:
9781285869681
Author:
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
Publisher:
Cengage Learning
Production and Operations Analysis, Seventh Editi…
Operations Management
ISBN:
9781478623069
Author:
Steven Nahmias, Tava Lennon Olsen
Publisher:
Waveland Press, Inc.