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Exam 14: Decision Analysis

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Question 31

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Exhibit 14.1 The following questions are based on the information below. An investor is considering 4 investments,A,B,C and leaving his money in the bank.The payoff from each investment is a function of the economic climate over the next 2 years.The economy can expand or decline.The following payoff matrix has been developed for the decision problem. -Refer to Exhibit 14.1.What decision should be made according to the maximax decision rule?

A) A
B) B
C) C
D) Bank

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Question 32

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Exhibit 14.9 The following questions are based on the information below. An investor is considering 4 investments,W,X,Y,and Z.The payoff from each investment is a function of the economic climate over the next 2 years.The economy can expand or decline.The following payoff matrix has been developed for the investment decision problem. $\begin{array}{|c|c|c|c|c|c|}\hline & \mathrm{A} & \mathrm{B} & \mathrm{C} & \mathrm{D} & E \\\hline 1 & & \begin{array}{|ll} & \text { Payoff } \\\text { Matrix } & \\\end{array} & & & \\\hline 2 & & & & & \\\hline 3 & & \text { Economy } & & & \\\hline 4 & \text { Investment } & \text { Decline } & \text { Expand } & & \text { Choice } \\\hline 5 & \mathrm{~W} & 0 & 80 & & \\\hline 6 & \mathrm{X} & \begin{array}{l}3 \\0 \\\end{array} & 70 & & \\\hline 7 & \mathrm{Y} & \begin{array}{l}5 \\0 \\\end{array} & 35 & & \\\hline 8 & z & \begin{array}{l}2 \\0 \\\end{array} & 20 & & \\\hline & \text { Payoffs } & & & & \\\hline\end{array}$ -Refer to Exhibit 14.9.What formula should go in cell D5 and get copied to D6:D8 to implement the maximax decision rule?

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Question 33

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Exhibit 14.7 The following questions use the information below. A decision maker is faced with two alternatives.The decision maker has determined that she is indifferent between the two alternatives when p = 0.45. Alternative 1: Receive $82,000 with certainty Alternative 2: Receive $143,000 with probability p and lose $15,000 with probability 1 − p) . -Refer to Exhibit 14.7.What is the decision maker's risk premium for this problem?

Exhibit 14.12 The following questions use the information below.A decision maker is faced with two alternatives. Alternative 1: Receive $40,000 with certainty Alternative 2: Receive $80,000 with probability p and lose $5,000 with probability 1 − p). The decision maker has determined that she is indifferent between the two alternatives when p = 0.7. -Refer to Exhibit 14.12.What is the decision maker's certainty equivalent for this problem?

An investor is considering 2 investments,A,B,which can be purchased now for $10.There is a 40% chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly.If A grows rapidly the investor can cash it in for $80 or trade it for investment C which has a 25% chance of growing to $100 and a 75% chance of reaching $80.If A grows slowly it is sold for $50.There is a 70% chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly.If B grows rapidly the investor can cash it in for $100 or trade it for investment D which has a 20% chance of growing to $95 and an 80% chance of reaching $80.If B grows slowly it is sold for $45.Draw the decision tree for this problem.

Exhibit 14.13 The following questions use the information below. A student wants to buy a new car.She has three cars to choose from,A,B and C.The cars differ with respect to price,performance and looks.The student has developed the following AHP tables for price and summary.The other tables are not shown due to space limitations. -Refer to Exhibit 14.13.What formula should go in cell F11 and copied to cells F12:F13 of the Price worksheet to compute the Price Score?

Exhibit 14.9 The following questions are based on the information below. An investor is considering 4 investments,W,X,Y,and Z.The payoff from each investment is a function of the economic climate over the next 2 years.The economy can expand or decline.The following payoff matrix has been developed for the investment decision problem. $\begin{array}{|c|c|c|c|c|c|}\hline & \mathrm{A} & \mathrm{B} & \mathrm{C} & \mathrm{D} & E \\\hline 1 & & \begin{array}{|ll} & \text { Payoff } \\\text { Matrix } & \\\end{array} & & & \\\hline 2 & & & & & \\\hline 3 & & \text { Economy } & & & \\\hline 4 & \text { Investment } & \text { Decline } & \text { Expand } & & \text { Choice } \\\hline 5 & \mathrm{~W} & 0 & 80 & & \\\hline 6 & \mathrm{X} & \begin{array}{l}3 \\0 \\\end{array} & 70 & & \\\hline 7 & \mathrm{Y} & \begin{array}{l}5 \\0 \\\end{array} & 35 & & \\\hline 8 & z & \begin{array}{l}2 \\0 \\\end{array} & 20 & & \\\hline & \text { Payoffs } & & & & \\\hline\end{array}$ -Refer to Exhibit 14.9.What decision should be made according to the minimax regret decision rule?

How are states of nature assigned probabilities?

In a graphical representation of decision trees the event nodes are represented by

Exhibit 14.8 The following questions use the information below. A company needs to buy a new insurance policy.They have three policies to choose from,A,B and C.The policies differ with respect to price,coverage and ease of billing.The company has developed the following AHP tables for price and summary.The other tables are not shown due to space limitations. $\begin{array}{|c|c|c|c|c|c|c|c}\hline & \text { A } & \text { B } & \text { C } & \text { D } & \text { E } & \text { F } & \text { G } \\\hline 1 & & & & & & & \\\hline 2 & & & & & & & \\\hline 3 & & \text { Criterion } & \text { A } & \text { B } & \text { C } & & \\\hline 4 & & \text { Price } & 0.648 & 0.230 & 0.122 & & 0.123 \\\hline 5 & & \text { Coverage } & 0.213 & 0.701 & 0.085 & & 0.320 \\\hline 7 & & \text { Billing } & 0.120 & 0.272 & 0.608 & & 0.557 \\\hline 7 & & \text { Weighted Avg Score: } & 0.215 & 0.404 & 0.381 & & 1.000 \\\hline & & \text { Summary } & & & & & \\\hline\end{array}$ -Refer to Exhibit 14.8.What formula should go in cell C7 and get copied to D7:E7 of the Summary worksheet to compute the Weighted Average Score?

An investor is considering 2 investments,A,B,which can be made now.After these investments are made he can pursue choices C,D,E and F depending on whether he chose A or B originally.He has developed the following decision tree to aid in his selection process.What are the correct original and subsequent decisions based on an expected monetary value criteria?

Which of the following summarizes the final outcome for each decision alternative?

Decision models are applicable when

Exhibit 14.5 The following questions are based on the information below. An investor is considering 4 investments,A,B,C,D.The payoff from each investment is a function of the economic climate over the next 2 years.The economy can expand or decline.The following decision tree has been developed for the problem.The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. -Refer to Exhibit 14.5.What is the expected monetary value for the investor's problem?

Expected regret is also called

The minimum EOL in a decision problem will always

An investor is considering 4 investments,A,B,C,D.The payoff from each investment is a function of the economic climate over the next 2 years.The economy can be weak or strong.The investor has estimated the probability of a declining economy at 30% and an expanding economy at 70%.Draw the decision tree for this problem and determine the correct decision for this investor based on the expected monetary value criteria. Payoff Matrix Economy $\begin{array} { c c c } \text { Investment } & \text { Weak } & \text { Strong } \\\hline \text { A } & - 30 & 120 \\\text { B } & 20 & 60 \\\text { C } & 30 & 35 \\\text { D } & 15 & 30\end{array}$

The decision rule which determines the maximum payoff for each alternative and then selects the alternative associated with the largest payoff is the

Suppose that EVPI=0.This means that

Exhibit 14.1 The following questions are based on the information below. An investor is considering 4 investments,A,B,C and leaving his money in the bank.The payoff from each investment is a function of the economic climate over the next 2 years.The economy can expand or decline.The following payoff matrix has been developed for the decision problem. -Refer to Exhibit 14.1.What formula should go in cell D5 to implement the maximin decision rule?