A brokerage firm is considering investment options for its clients. If the market is good the clients
Question:
A brokerage firm is considering investment options for its clients. If the market is good the clients could get a net profit of $120,000 for Fund A, $100,000 for Fund B, and $80,000 for Fund C. If the market is fair, they could get a net profit of $20,000 for Fund A, $40,000 for Fund B, and $30,000 for Fund C. If the market is poor, clients would lose $30,000 for Fund A, $50,000 for Fund B, and $15,000 for Fund C. They must Fund one to invest in for their clients. An economist group offers to do a market study for $2,000. They know the following probabilities:
P(good market Fund A | favorable study) = 0.6
P(fair market Fund A | favorable study) = 0.3
P(poor market Fund A | favorable study) = 0.1
P(good market Fund A | unfavorable study) = 0.2
P(fair market Fund A | unfavorable study) = 0.1
P(poor market Fund A | unfavorable study) = 0.7
P(good market Fund B | favorable study) = 0.8
P(fair market Fund B | favorable study) = 0.1
P(poor market Fund B | favorable study) = 0.1
P(good market Fund B | unfavorable study) = 0.2
P(fair market Fund B | unfavorable study) = 0.3
P(poor market Fund B | unfavorable study) = 0.5
P(good market Fund C | favorable study) = 0.6
P(fair market Fund C | favorable study) = 0.2
P(poor market Fund C | favorable study) = 0.2
P(good market Fund C | unfavorable study) = 0.2
P(fair market Fund C | unfavorable study) = 0.2
P(poor market Fund C | unfavorable study) = 0.6
P (favorable study) = 0.6
P (good market) = 0.4
P (fair market) = 0.4
P (poor market) = 0.2
a. Calculate EMVs and draw a decision tree (20 pts)
b. Write out the recommended strategy (2 pts)
c. Calculate EVSI for how much the brokerage firm would be willing to pay for the research study (3 pts)
Discrete and Combinatorial Mathematics An Applied Introduction
ISBN: 978-0201726343
5th edition
Authors: Ralph P. Grimaldi