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 decisions has the largest expected 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

Use the information below to answer the following question(s). Below are four options for an investment decision. \[\begin{array} { | l | l | l | l | } \hline \text { Decision/Event } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { Bank CD } & 0.80 & 0.80 & 0.80 \\ \hline \text { Bond fund } & - 0.75 & 0.86 & 1.50 \\ \hline \text { Index fund } & 0.00 & 0.90 & 1.20 \\ \hline \text { Growth fund } & - 0.30 & 0.70 & 1.40 \\ \hline \end{array}\] -If the payoff is $2200 and R is equal to $500, what is the utility function?

A) 0.9877 B) 0.6819 C) 0.7645 D) 0.4502 A) 0.9877 B) 0.6819 C) 0.7645 D) 0.4502

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 30-year fixed decision?

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

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 3-year ARM?

A) $ 52,792 B) $ 45,212 C) $ 51,094 D) $ 55,278 A) $ 52,792 B) $ 45,212 C) $ 51,094 D) $ 55,278

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. -What is the expected payoff for the 1-year ARM?

A) $ 53,082.00 B) $ 16,951.00 C) $ 56,938.00 D) $ 18,979.30 A) $ 53,082.00 B) $ 16,951.00 C) $ 56,938.00 D) $ 18,979.30

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 decisions has the largest expected payoff?

(Multiple Choice)

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Question 41

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 -If the payoff is $2200 and R is equal to $500, what is the utility function?

(Multiple Choice)

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Question 42

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 mean obtained from the simulation results? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 43

Use the information below to answer the following question(s) Misty Inc. launches a new range of perfumes for men and women. The probability of high consumer demand for the product is 0.6 and low consumer demand is 0.4. The probability of a favorable survey response given high consumer demand is 0.9 and the probability of a favorable survey response given low consumer demand is 0.2. -A children's welfare fundraiser involves selling one thousand $70 tickets to win a $20,000 grand prize. If the probability of winning is only 0.005, what is the expected payoff?

(Multiple Choice)

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Question 44

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 mean absolute deviation obtained from the simulation results? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 45

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 30-year fixed decision?

(Multiple Choice)

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Question 46

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 coefficient of variation obtained from the simulation results? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 47

Describe the steps involved in the construction of a decision tree.

(Essay)

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Question 48

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 3-year ARM?

(Multiple Choice)

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Question 49

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. -What is the expected payoff for the 1-year ARM?

(Multiple Choice)

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Question 50

Describe the steps involved in the construction of a decision tree.

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