Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). The payoff table given below lists four mortgage options: $\begin{array}{|l|l|l|l|}\hline &\text { Outcome }\\ \hline \text { Probability } & {\mathbf{0 . 6}} &{\mathbf{0 . 3}} &{\mathbf{0 . 1}} \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}$ The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1. -Which of the following is considered the best expected value decision?

A) 1-year ARM B) 3-year ARM C) 5-year ARM D) 30-year fixed A) 1-year ARM B) 3-year ARM C) 5-year ARM D) 30-year fixed

Use the information below to answer the following question(s). Below are four options for an investment decision. \[\begin{array} { | l | l | l | l | } \hline \text { Decision/Event } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { Bank CD } & 0.80 & 0.80 & 0.80 \\ \hline \text { Bond fund } & - 0.75 & 0.86 & 1.50 \\ \hline \text { Index fund } & 0.00 & 0.90 & 1.20 \\ \hline \text { Growth fund } & - 0.30 & 0.70 & 1.40 \\ \hline \end{array}\] -Based on the average utility, which of the following is considered the worst decision?

A) Bank CD B) Bond fund C) Index fund D) Growth fund A) Bank CD B) Bond fund C) Index fund D) Growth fund

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: \[\begin{array} { | l | l | l | l | } \hline &{ \text { Outcome } } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -What is the best payoff rate for the 1-year ARM?

A) $ 49,618 B) $ 43,650 C) $ 38,560 D) $ 66,645 A) $ 49,618 B) $ 43,650 C) $ 38,560 D) $ 66,645

Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: $\begin{array}{|l|l|l|l|}\hline &\text { Outcome }\\ \hline \text { Probability } & {\mathbf{0 . 6}} &{\mathbf{0 . 3}} &{\mathbf{0 . 1}} \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 68,246 & \$ 47,487 & \$ 36,450 \\ \hline \text { 3-year ARM } & \$ 64,897 & \$ 49,356 & \$ 44,898 \\ \hline \text { 5-year ARM } & \$ 57,240 & \$ 52,988 & \$ 50,642 \\ \hline \text { 30-year fixed } & \$ 59,720 & \$ 59,720 & \$ 59,720 \\ \hline \end{array}$ The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1. Answer the following questions by creating a decision tree. -Which of the following is considered the best expected value decision?

A) 1-year ARM B) 3-year ARM C) 5-year ARM D) 30-year fixed A) 1-year ARM B) 3-year ARM C) 5-year ARM D) 30-year fixed

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: \[\begin{array} { | l | l | l | l | } \hline &{ \text { Outcome } } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -Which of the following decisions has the best average payoff?

A) 1-year ARM B) 3-year ARM C) 5-year ARM D) 30-year fixed A) 1-year ARM B) 3-year ARM C) 5-year ARM D) 30-year fixed

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: \[\begin{array} { | l | l | l | l | } \hline &{ \text { Outcome } } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -What is the average payoff for the 5-year ARM?

A) $ 49,514 B) $ 52,015 C) $ 53,395 D) $ 51,641 A) $ 49,514 B) $ 52,015 C) $ 53,395 D) $ 51,641

Use the information given below to answer the following question(s). Below is a payoff table that lists three mortgage options: \[\begin{array} { | l | l | l | l | } \hline & { \text { Outcome } } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 2-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 5-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 25-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -What is the maximum opportunity loss incurred for the 2-year ARM?

A) $ 8,626 B) $ 13,716 C) $ 14,369 D) $ 10,581 A) $ 8,626 B) $ 13,716 C) $ 14,369 D) $ 10,581

Use the information below to answer the following question(s). Below are four options for an investment decision. \[\begin{array} { | l | l | l | l | } \hline \text { Decision/Event } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { Bank CD } & 0.80 & 0.80 & 0.80 \\ \hline \text { Bond fund } & - 0.75 & 0.86 & 1.50 \\ \hline \text { Index fund } & 0.00 & 0.90 & 1.20 \\ \hline \text { Growth fund } & - 0.30 & 0.70 & 1.40 \\ \hline \end{array}\] -Based on the average utility, which of the following is considered the best decision?

A) Bank CD B) Bond fund C) Index fund D) Growth fund A) Bank CD B) Bond fund C) Index fund D) Growth fund

Use the information below to answer the following question(s). Below are four options for an investment decision. \[\begin{array} { | l | l | l | l | } \hline \text { Decision/Event } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { Bank CD } & 0.80 & 0.80 & 0.80 \\ \hline \text { Bond fund } & - 0.75 & 0.86 & 1.50 \\ \hline \text { Index fund } & 0.00 & 0.90 & 1.20 \\ \hline \text { Growth fund } & - 0.30 & 0.70 & 1.40 \\ \hline \end{array}\] -Which of the following is the average utility for the bond fund decision?

A) 1.18 B) 0.38 C) 0.54 D) 0.43 A) 1.18 B) 0.38 C) 0.54 D) 0.43

Compute the expected value of perfect information. Use the below information to answer the following question(s). Below is a payoff table with three mortgage options: \[\begin{array} { | l | l | l | l | } \hline & { \text { Outcome } } \\ \hline \text { Probability } & { \mathbf { 0 . 6 } } & { \mathbf { 0 . 3 } } & { \mathbf { 0 . 1 } } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -What is the expected opportunity loss for the 1-year ARM?

A) $ 7,979.60 B) $ 3,959.40 C) $ 6,853.50 D) $ 8,621.40 A) $ 7,979.60 B) $ 3,959.40 C) $ 6,853.50 D) $ 8,621.40

Use the information given below to answer the following question(s). Below is a payoff table that lists three mortgage options: \[\begin{array} { | l | l | l | l | } \hline & { \text { Outcome } } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 2-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 5-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 25-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -What is the maximum opportunity loss incurred for the 25-year fixed decision?

A) $ 8,626 B) $ 13,716 C) $ 14,369 D) $ 10,581 A) $ 8,626 B) $ 13,716 C) $ 14,369 D) $ 10,581

Exam 16: Decision Analysis

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). The payoff table given below lists four mortgage options: Outcome Probability Decision Rates Rise Rates Stable Rates Fall 1-year ARM \ 66,645 \ 43,650 \ 38,560 3-year ARM \ 62,857 \ 47,698 \ 42,726 5-year ARM \ 55,895 \ 50,894 \ 48,134 30-year fixed \ 52,276 \ 52,276 \ 52,276 The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1. -Which of the following is considered the best expected value decision?

(Multiple Choice)

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Question 21

Use the information below to answer the following question(s). Below are four options for an investment decision. Decision/Event Rates Rise Rates Stable Rates Fall Bank CD 0.80 0.80 0.80 Bond fund -0.75 0.86 1.50 Index fund 0.00 0.90 1.20 Growth fund -0.30 0.70 1.40 -Based on the average utility, which of the following is considered the worst decision?

(Multiple Choice)

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Question 22

A(n) is also called a minimax regret strategy.

(Multiple Choice)

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Question 23

A(n) is a matrix whose rows correspond to decisions and whose columns correspond to events.

(Multiple Choice)

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Question 24

An outcome over which the decision maker has complete control is called an event node.

(True/False)

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Question 25

The average payoff strategy weights the likelihood that the actual outcomes can occur.

(True/False)

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Question 26

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: Outcome Decision Rates Rise Rates Stable Rates Fall 1-year ARM \ 66,645 \ 43,650 \ 38,560 3-year ARM \ 62,857 \ 47,698 \ 42,726 5-year ARM \ 55,895 \ 50,894 \ 48,134 30-year fixed \ 52,276 \ 52,276 \ 52,276 -What is the best payoff rate for the 1-year ARM?

(Multiple Choice)

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Question 27

Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: Outcome Probability Decision Rates Rise Rates Stable Rates Fall 1-year ARM \ 68,246 \ 47,487 \ 36,450 3-year ARM \ 64,897 \ 49,356 \ 44,898 5-year ARM \ 57,240 \ 52,988 \ 50,642 30-year fixed \ 59,720 \ 59,720 \ 59,720 The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1. Answer the following questions by creating a decision tree. -Which of the following is considered the best expected value decision?

(Multiple Choice)

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Question 28

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: Outcome Decision Rates Rise Rates Stable Rates Fall 1-year ARM \ 66,645 \ 43,650 \ 38,560 3-year ARM \ 62,857 \ 47,698 \ 42,726 5-year ARM \ 55,895 \ 50,894 \ 48,134 30-year fixed \ 52,276 \ 52,276 \ 52,276 -Which of the following decisions has the best average payoff?

(Multiple Choice)

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Question 29

Describe the major tools and criteria for decision making. Use the information below to answer the following question(s). Below is a payoff table that lists four mortgage options: Outcome Decision Rates Rise Rates Stable Rates Fall 1-year ARM \ 66,645 \ 43,650 \ 38,560 3-year ARM \ 62,857 \ 47,698 \ 42,726 5-year ARM \ 55,895 \ 50,894 \ 48,134 30-year fixed \ 52,276 \ 52,276 \ 52,276 -What is the average payoff for the 5-year ARM?

(Multiple Choice)

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Question 30

In a minimin strategy, the decision which minimizes the minimum payoff is chosen.

(True/False)

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Question 31

Use the information given below to answer the following question(s). Below is a payoff table that lists three mortgage options: Outcome Decision Rates Rise Rates Stable Rates Fall 2-year ARM \ 66,645 \ 43,650 \ 38,560 5-year ARM \ 62,857 \ 47,698 \ 42,726 25-year fixed \ 52,276 \ 52,276 \ 52,276 -What is the maximum opportunity loss incurred for the 2-year ARM?

(Multiple Choice)

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Question 32

What is the expected value of perfect information?

(Essay)

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Question 33

Use the information below to answer the following question(s). Below are four options for an investment decision. Decision/Event Rates Rise Rates Stable Rates Fall Bank CD 0.80 0.80 0.80 Bond fund -0.75 0.86 1.50 Index fund 0.00 0.90 1.20 Growth fund -0.30 0.70 1.40 -Based on the average utility, which of the following is considered the best decision?

(Multiple Choice)

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Question 34

Use the information below to answer the following question(s). Below are four options for an investment decision. Decision/Event Rates Rise Rates Stable Rates Fall Bank CD 0.80 0.80 0.80 Bond fund -0.75 0.86 1.50 Index fund 0.00 0.90 1.20 Growth fund -0.30 0.70 1.40 -Which of the following is the average utility for the bond fund decision?

(Multiple Choice)

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Question 35

Compute the expected value of perfect information. Use the below information to answer the following question(s). Below is a payoff table with three mortgage options: Outcome Probability Decision Rates Rise Rates Stable Rates Fall 1-year ARM \ 66,645 \ 43,650 \ 38,560 3-year ARM \ 62,857 \ 47,698 \ 42,726 30-year fixed \ 52,276 \ 52,276 \ 52,276 -What is the expected opportunity loss for the 1-year ARM?

(Multiple Choice)

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Question 36

Use the information below to answer the following question(s). Below is a decision tree illustrating the R&D process for a new drug. Let us assume that if market is large, payoff is lognormally distributed with a mean of $4,900 million and a standard deviation of $1,000 million; if market is medium, payoff is lognormally distributed with a mean of $2,500 million and a standard deviation of $500 million; and if market is small, payoff is normally distributed with a mean of $1,800 million and standard deviation of $200 million. Let us also assume that the cost of clinical trials is uncertain and estimates are modeled with a triangular distribution with a minimum of -$700 million, a most likely value of - $550 million, and a maximum of -$500 million. Use 10,000 trials and a random seed of 1. -What is the value of standard deviation obtained from the simulation results? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 37

Use the information below to answer the following question(s). Below is a decision tree for the airline revenue management. Create a one-way table and answer the following questions. -What is the expected value of the ticket when a discount is offered on the full fare? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 38

Use the information given below to answer the following question(s). Below is a payoff table that lists three mortgage options: Outcome Decision Rates Rise Rates Stable Rates Fall 2-year ARM \ 66,645 \ 43,650 \ 38,560 5-year ARM \ 62,857 \ 47,698 \ 42,726 25-year fixed \ 52,276 \ 52,276 \ 52,276 -What is the maximum opportunity loss incurred for the 25-year fixed decision?

(Multiple Choice)

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Question 39

A payoff table is a matrix whose rows correspond to events and whose columns correspond to decisions.

(True/False)

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Question 40

A(n) is also called a minimax regret strategy.

A(n) is a matrix whose rows correspond to decisions and whose columns correspond to events.

An outcome over which the decision maker has complete control is called an event node.

The average payoff strategy weights the likelihood that the actual outcomes can occur.

In a minimin strategy, the decision which minimizes the minimum payoff is chosen.

What is the expected value of perfect information?

A payoff table is a matrix whose rows correspond to events and whose columns correspond to decisions.

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