There are three investments, B1, B2 and B3. All of them have the same expected valueand each with two possible payoffs. The payoffs from investment B1 are independent frompayoffs from B2 and B3. The payoffs from B2 and B3 are perfectly negatively correlated,which means that when B2 has a high payoff, B3 has a low payoff, and vice versa.An investor has only $800 to invest. Find the investment strategy that minimizes therisk.Hint: It may be easier to think of the following situation. Let events Fand G be independent. The following is given:Payoff from investing $100 in either B2 or B3В$100 $140CasesB3Probabilityevent F happensevent F does not happen $140 $1000.50.5andPayoff from investing $100 in BỊCasesВProbability$100event G happensevent G does not happen $1400.50.5

Answered: There are three investments, B1, B2 and…

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...

See similar textbooks

Similar questions

Larry’s Bakery operates a chain of ten high-end bakeries. Larry, the owner of these amazing bakeries, is looking at two options to increase his revenues throughout his chain of bakeries. The first option is to launch a loyalty card. Doing this would cost Larry $500,000. The probability that this would result in high sales is 0.6, which means the probability it would result in low sales is 0.4. If high sales are generated from this option, Larry can expect to see additional revenues of $1,000,000. If low sales are generated from this option, Larry can expect to see additional revenues of only $750,000. The second option Larry has is to cut the prices throughout his bakeries. Doing so would cost him $300,000. The probability that this would result in high sales is 0.8. If doing this results in high sales, Larry can expect to see additional revenues of $800,000. If it results in low sales, he can expect to see additional revenues of only $500,000. Larry obviously has a tough decision…
Consider a firm run by an “incumbent” manager. Suppose the incumbent manager has the opportunity to invest in one of two different projects, Project 1 or Project 2. The incumbent manager has a higher ability in managing Project 1 rather than Project 2. Also, if theincumbent is fired by shareholders, she is replaced by an “alternative” manager whose ability to manage Project 1 is lower than the incumbent’s ability. Suppose the investment in a project is irreversible, and the shareholders’ choice of the incumbent manager salary (as well as their decision on whether to fire her) is taken afterthe investment is made. Also, assume the incumbent manager has a stake in the firm she runs, but she does not fully control it. Questions:(a) Suppose none of the projects gives the manager a direct utility. According to Shleifer and Vishny (1989), which of the two projects should the incumbent manager choose? What is the economic rationale behind this choice? Explain. (b) Suppose the incumbent…
A salesperson uses three different airlines. The probabilities of switching from one airline to another in consecutive flights are shown below. If the last flight was on Delta, what is the probability that the next was on American? American Delta Southwest American 0.5 0.25 0.25 Delta 0.2 0.6 0.2 Southwest 0.3 0.3 0.4 A 0.5 B 0.2 C 0.25 D 0.6
Farm Grown, Inc., produces cases of perishable food products. Each case contains an assortment of vegetables and other farm products. Each case costs $5 and sells for $15. If there are any cases not sold by the end of the day, they are sold to a large food processing company for $3 a case. The probability that daily demand will be 100 cases is 0.3, the probability that daily demand will be 200 cases is 0.4, and the probability that daily demand will be 300 cases is 0.3. Farm Grown has a policy always satisfying customer demands. If its own supply of cases is less than the demand, then they buy the necessary vegetables from a competitor. The estimated cost of doing this is $16 per case. 1. Draw a decision table for this problem. 2. What do you recommend? 3. Farm Grown, Inc. has reason to believe the probabilities may not be reliable due to changing conditions. If these probabilities are ignored, what decision would be made using the optimistic criterion? What decision would be made…
You are planning to rent a car for a one-week vacation. You have the option of buying an insurance that costs $80 dollars for a week. If you do not purchase insurance, you would be personally liable for any damages. You anticipate that a minor collision will cost $2,000, whereas a major accident might cost $16,000 in repairs. Develop a payoff table for this situation. What decision should you make using each strategy? Aggressive (Optimistic) Conservative (Pessimistic) Opportunity Loss You have recently read in a magazine that that the probability of a major accident is 0.05% and that the probability of a minor collision is 0.18%. Construct a decision tree and identify the best expected value decision.
A student who is majoring in accounting has two jobs offers: one from PwC for $80,000 and one for E&Y for $76,000. She just found out that she has also received an offer from her dream company, Deloitte for $72,000. She also heard from friends that another student last year may have received an offer averaging around $90,000. She wants to take the Deloitte offer, but her OB professor tells her that she needs to negotiate with them for a better salary. In this negotiation, what is her BATNA? O a O b. $76,000 $72,000 $90,000 $18,000 (the difference between $90,000 and $72,000) OC O d. Oe. $80,000
Company A's stock sells for $142 a share and has a 3-year average annual return of $27 per share. The beta value, a measure of risk, is 0.38. Company B sells for $149 a share and has a 3-year average annual return of $61 a share. The beta value is 1.23. Tori wants to spend no more than $12000 investing in these two stocks, but she wants to obtain at least $3000 in annual revenue. Tori also wants to minimize the risk, that is, the beta value. Determine how many shares of each stock Tori should buy.
Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. If the seller sells the buyer a good quality car, what is the net-benefit to the seller? a. A net gain of $4,000. b. A net gain of $20,000. c. A net loss of $4,000. d. A net loss of $10,000.
46. You are making several runs of a simulation model,each with a different value of some decision variable(such as the order quantity in the Walton calendarmodel), to see which decision value achieves thelargest mean profit. Is it possible that one value beatsanother simply by random luck? What can you do tominimize the chance of a “better” value losing out toa “poorer” value?
Nippon Steel's expenses for heating and cooling a large manufacturing facility are expected to increase according to an arithmetic gradient beginning in year 2. If the cost is $550,000 this year (year 0) and will be $550,000 again in year 1, but then it is estimated to increase by $45,000 each year through year 12, what is the equivalent annual worth in years 1 to 12 of these energy costs at an interest rate of 11% per year? The equivalent annual worth is determined to be $
A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the “shell” will cost $152,500 and is expected to have a $50,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $16,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $9,000 per year. If the company’s MARR is 13% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options. The future worth when purchased is $ The future worth when leased is $

Recommended textbooks for you

Practical Management Science

Operations Management

ISBN:

9781337406659

Author:

WINSTON, Wayne L.

Publisher:

Cengage,

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

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

Business in Action

Operations Management

ISBN:

9780135198100

Author:

BOVEE

Publisher:

PEARSON CO

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.

SEE MORE TEXTBOOKS