Question 7b: Expand the decision tree (you developed in Question 1) to provide the results of your calculations to questions 6 and 7.

Question 1: Construct a decision tree depicting the stock selection based the information available on the above payoff table. Develop the decision tree using an Excel template or using the QM software.

Question 6: Using Bayes theorem, compute the posterior probabilities (P(Si / Fi)for each.

Question 7a: Use the results from question 6, compute the EMVs for the two decision alternatives and indicate the best course of action you would recommend to the investor. Explain the rational of your decision.

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