Question 21 0.8 pts Steve's Mutual Fund Dession Problem Payoff Table Sensitivity Analysis Graph Share 0.25 Mutual fund Stock Fund Ce come Badan Cara DON Daz DO 24 0.1 Return on Fund 0.05 Potom condo 2.4 . 1 22 0.3 0,0 06 ca DA Da DO DUGA w DAS DOG w Dag w DGB Dua D. DLL D.L2 DOS DOA ROAD Bas ROS DOS DOS DOS DOS Probability The sensitivity analysis graph show that the mutual fund option is strictly dominant There is not enough information provided for us to come to a reasonable conlclusion the lease risky of the three options because it yields the highest return always dominant when the probability of good economic conditions is above.5 not strictly dominant Good economic conditions 20% 20% 20% Stock fund 0.5 Expected value chance node 1 Bad economic conditions 8% 0.5 Good economic conditions 12% 12% Recommended decision: index fund 12% 2 Index fund maximum expected value Expected value chance node 2 0.5 Bad economic conditions 2% 2% 2% 0.5 Good economic conditions 6% 6% Bond fund 0 5% Expected value chance node 3 0.5 Bad economic conditions 4% FIGURE 4.18 Mutual Fund Example Decision Tree The expected value at chance node 1 is: 50% 75% 6% 7% We do not have enough information to calculate this value 0.5 Good economic conditions 20% 20% 20% Stock fund 0 Expected value chance node 1 0.5 Bad economic conditions 0.5 Recommended decision: index fund 12% Good economic conditions 12% 12% 2 2 maximum expected value Index fund 0 Expected value chance node 2 0.5 Bad economic conditions 2% 2% 0.5 Good economic conditions 6% Bond fund 0 5% Expected value chance node 3 0.5 Bad economic conditions 4% 4% FIGURE 4.18 Mutual Fund Example Decision Tree The expected value at chance node 2 is: 75% O 7% 6% We do not have enough information to calculate this value O 50% Question 24 0.8 pts The Hurwicz criterion: O is a compromise between maximax and minimax regret criteria Both A and B Both A and C uses a coefficient of optimism to weight the best and worst payoff for each decision is a compromise between maximax and maximin criteria Question 21 0.8 pts Steve's Mutual Fund Dession Problem Payoff Table Sensitivity Analysis Graph Share 0.25 Mutual fund Stock Fund Ce come Badan Cara DON Daz DO 24 0.1 Return on Fund 0.05 Potom condo 2.4 . 1 22 0.3 0,0 06 ca DA Da DO DUGA w DAS DOG w Dag w DGB Dua D. DLL D.L2 DOS DOA ROAD Bas ROS DOS DOS DOS DOS Probability The sensitivity analysis graph show that the mutual fund option is strictly dominant There is not enough information provided for us to come to a reasonable conlclusion the lease risky of the three options because it yields the highest return always dominant when the probability of good economic conditions is above.5 not strictly dominant Good economic conditions 20% 20% 20% Stock fund 0.5 Expected value chance node 1 Bad economic conditions 8% 0.5 Good economic conditions 12% 12% Recommended decision: index fund 12% 2 Index fund maximum expected value Expected value chance node 2 0.5 Bad economic conditions 2% 2% 2% 0.5 Good economic conditions 6% 6% Bond fund 0 5% Expected value chance node 3 0.5 Bad economic conditions 4% FIGURE 4.18 Mutual Fund Example Decision Tree The expected value at chance node 1 is: 50% 75% 6% 7% We do not have enough information to calculate this value 0.5 Good economic conditions 20% 20% 20% Stock fund 0 Expected value chance node 1 0.5 Bad economic conditions 0.5 Recommended decision: index fund 12% Good economic conditions 12% 12% 2 2 maximum expected value Index fund 0 Expected value chance node 2 0.5 Bad economic conditions 2% 2% 0.5 Good economic conditions 6% Bond fund 0 5% Expected value chance node 3 0.5 Bad economic conditions 4% 4% FIGURE 4.18 Mutual Fund Example Decision Tree The expected value at chance node 2 is: 75% O 7% 6% We do not have enough information to calculate this value O 50% Question 24 0.8 pts The Hurwicz criterion: O is a compromise between maximax and minimax regret criteria Both A and B Both A and C uses a coefficient of optimism to weight the best and worst payoff for each decision is a compromise between maximax and maximin criteria