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# PART 1 Dr. Jacobs West is an investment manager for Prokop Investments. He is currently faced with the question of which company to invest

## PART 1 Dr. Jacobs West is an investment manager for Prokop Investments. He is currently faced with the question of which company to invest in. There are five potential investment companies located in Waterloo, Vancouver, Calgary, YellowKnife, and New York. Ignacio must make this investment (i.e., no option to forego the investment)). The level of interest rates impacts the profit from each investment The following profits (in millions of dollars) are indicated below LEVEL OF INTEREST RATE City of Investment Low $24.00 $28.00 $20.00 $20.00 $40.00 Moderate $20.00 $15.00 $20.00 High $15.00 $10.00 $20.00 Waterloo Vancouver Calgary $18.00 $22.00 $16.00 $12.00 Yellow Knife New York Prior Prob 0.5 0.3 0.2 PART 2 The management team wants to decide whether or not to hire an economist, Dr. Icarus Crane, to predict future interest rates. The economist can only predict if there will be high interest rates or low interest rates. In the past, when interest rates were low, the economist predicted high interest rates 10% of the time. When interest rates were moderate, the economist predicted high interest rates 40% of the time; when interest rates were high, the economist predicted high interest rates 80% of the time. The economist is charging $100,000. Using the information above 5) Draw a decision tree for the scenario above 6) Calculate posterior probabilities for the tree 7) Calculate the Expected value of Sample Information (EVSI) 8) Calculate the efficiency of the sample

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We will first prepare the payoff table to understand the same City Low Moderate High Waterloo 24 20 15 Vancouver 28 15 10 Calgary 20 20 20 Yellow Knife 20 18 16 New York 40 22 12 Prior Probability 05 ...### Get Instant Access to Expert-Tailored Solutions

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