Question 4: Compute and prepare a summary table showing the EVMs and the EOLs for both stocks. Show all detailed required calculations.

Assume that the investor is aware, as well as, is willing to pay for market forecasts to revise the probabilities of the economic condition. Indeed, he/she is aware that Bayess theorem can be used to revise the probabilities associated with the state of the economic conditions. The market forecast will cost $100 dollars (roughly per $1000 investment for the forecast. Assume that such a forecast can predict either an expanding economy (F1), a declining or stagnant economy (F2). Past experience of the consultant indicates that, when there is a recession, prior forecast predict 20% of the time. When there is stable economy, prior forecasts predicted an expanding economy 40% of the time. When there is a

moderate growth, prior forecasts predicted an expanding economy 70% of the time. Finally, when there is a boom economy, prior forecasts predicted an expanding economy 90% of the time.

Let event S1 = recession; event S2 = stable economy; event S3 =moderate growth, and S4 = boom economy.

Problem 1: Analyzing Investments in Stock Selections You are providing advice to novice investor for selecting the best investment choice among two options depicted in the payoff table seen below (showing the expeeted return of a $1,000 investment in each investment alternative at the end of one year in each of the four economic conditions). Investment Option State of the Economy Recession A B Probability 0.1 0.4 Stable economy Moderate growth $50 $90 $1200 $170 - $70 $50 $270 $420 0.3 Boom 0.2