If the financial advisor predicts a boom state, what is the EMV of the investing bond, using the revised probability?

Problem 68

Sandy is going to make investment for the $10,000 which she deposited for the past 2 year. Her financial advisor presented the following tables which show (1)
expected profits (in $10,000’s) for various states of nature and their probabilities and (2) the advisor’s prediction ability about the state of nature.

Revise the prior probabilities in light of advisor’s prediction ability.

Transcribed Image Text:

Probability of nature Bonds Stocks Advisor's Prediction State of nature Recession S 0.2 -5.0 -30.0 Recession Z Flat Z Boom Z3 Flat S 0.5 1.0 3.0 State of nature Recession S 0.7 0.2 0.1 Boom S3 0.3 10.0 20.0 Flat S 0.2 0.6 0.2 EMV 2.5 1.5 Boom S3 0.1 0.1 0.8