Should Mr. Investor invest in stocks or keep money in savings account? If he decides to invest in stocks, then which stock(s) should he buy? To find out the solution, address below requests: 

 1. Define decision alternatives, states of nature, and consequence.

 2. Develop a decision tree indicating branches along with probability values. 

 3. Using Bayes' Theorem compute branch probabilities tables for both favorable and unfavorable scenarios (two tables).

 4. Apply the expected value approach to make decisions as to whether Mr. Investor should invest or keep money in savings account. For this step show the application of expected value approach (Ev) using decision tree. You may need to draw up to 4 trees unit you arrive at the decision. 

 5. Comment on the final decision.

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Mr. Investor has a choice of investing in stocks (buying stocks 1 and 2) or keeping money in a savings account. The probabilities that the prices of these stocks will go up, stay the same, or go down are 0.25, 0.30, and 0.45, respectively. If the prices go up, stock 1 will make $30,000 and stock 2 will make $10,000. If the prices remain unchanged, there will be break even. If prices go down, stocks 1 and 2 will sustain losses of $35,000 and $5,000, respectively. If he keeps money in savings account, he is guaranteed a payoff of $5,000 as earning on interest. Some information from a broker regarding the degree of stability of future prices of stocks indicate favorable and unfavorable assessments by the following conditional probabilities. P (Favourable | Up) = 0.85 P (Favourable | Same) = 0.50 P (Favourable | Down) = 0.15 P (Unfavourable | Up) = 0.15 P (Unfavourable | Same) = 0.50 P (Unfavourable | Down) = 0.85 Mr. Investor has a choice of investing in stocks (buying stocks 1 and 2) or keeping money in a savings account. The probabilities that the prices of these stocks will go up, stay the same, or go down are 0.25, 0.30, and 0.45, respectively. If the prices go up, stock 1 will make $30,000 and stock 2 will make $10,000. If the prices remain unchanged, there will be break even. If prices go down, stocks 1 and 2 will sustain losses of $35,000 and $5,000, respectively. If he keeps money in savings account, he is guaranteed a payoff of $5,000 as earning on interest. Some information from a broker regarding the degree of stability of future prices of stocks indicate favorable and unfavorable assessments by the following conditional probabilities. P (Favourable | Up) = 0.85 P (Favourable | Same) = 0.50 P (Favourable | Down) = 0.15 P (Unfavourable | Up) = 0.15 P (Unfavourable | Same) = 0.50 P (Unfavourable | Down) = 0.85

Answer rating: 100% (QA)

To make an informed decision Mr Investor can use the concept of Expected Value to compare the potent... View the full answer