Brendon has $100,000 and he has three options to invest his money. He can put his...

 

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Brendon has $100,000 and he has three options to invest his money. He can put his money into fixed deposits at an annual interest rate of 1.58%. He can also invest his money in shares. In this case, he will invest forty percent of the money in financial sectors related stocks and the rest in technology related stocks. For the financial sector, if the economic outlook is good, the stocks will give a return of 5%; however, in a bad economic outlook the return is negative 2%. There is an equal chance that the economic outlook will be good or bad for the financial sector. For technology related shares, there is only forty percent chance that the economic outlook is good. If the economic outlook is good, the technology shares will give a return of 8%. However, if the economic outlook is bad, then Brendon will lose 3% on his investment. Brendon also has an option of investing in his friend's business. There is a 60% chance that it will be a success and he is expecting an investment return of 5% from the business. There is also a chance that the business will lose money and the expected loss is 3%. (a) Determine, using the decision tree approach, what is the best investment option for Brendon. Show the decision tree and compute the expected values for all relevant nodes. (10 marks) (b) (c) Brendon favors investing in shares as it gives him more control. Moreover, he hopes that the return on investment in shares is the highest among the three options. Determine what kind of economic outlook on financial sectors and/or technology can meet his requirements? (Hint: You should achieve at least the same investment return as part (a) by trying out various probabilities of a good or bad economic outlook.) (10 marks) For your company or a company you are familiar with, identify and describe a problem that involves making decisions in the presence of uncertainties. Show how one can help the company to make effective decisions when faced with uncertainties. (10 marks) Brendon has $100,000 and he has three options to invest his money. He can put his money into fixed deposits at an annual interest rate of 1.58%. He can also invest his money in shares. In this case, he will invest forty percent of the money in financial sectors related stocks and the rest in technology related stocks. For the financial sector, if the economic outlook is good, the stocks will give a return of 5%; however, in a bad economic outlook the return is negative 2%. There is an equal chance that the economic outlook will be good or bad for the financial sector. For technology related shares, there is only forty percent chance that the economic outlook is good. If the economic outlook is good, the technology shares will give a return of 8%. However, if the economic outlook is bad, then Brendon will lose 3% on his investment. Brendon also has an option of investing in his friend's business. There is a 60% chance that it will be a success and he is expecting an investment return of 5% from the business. There is also a chance that the business will lose money and the expected loss is 3%. (a) Determine, using the decision tree approach, what is the best investment option for Brendon. Show the decision tree and compute the expected values for all relevant nodes. (10 marks) (b) (c) Brendon favors investing in shares as it gives him more control. Moreover, he hopes that the return on investment in shares is the highest among the three options. Determine what kind of economic outlook on financial sectors and/or technology can meet his requirements? (Hint: You should achieve at least the same investment return as part (a) by trying out various probabilities of a good or bad economic outlook.) (10 marks) For your company or a company you are familiar with, identify and describe a problem that involves making decisions in the presence of uncertainties. Show how one can help the company to make effective decisions when faced with uncertainties. (10 marks)

Answer rating: 100% (QA)

EXPECTED VALUE FIXED DEPOSIT 158 1580 10000000158 1580 FIXED DEPOSIT Good Outlook 5 1000 10000004050... View the full answer