Use the information below to answer the following questions). The payoff table given below lists four mortgage options: \[\begin{array} { | l | l | c | c | } \hline && { \text { Outcome } } \\ \hline \text { Probability } & 0.6 & { 0.3 } & 0.1 \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] The probability of rates rising is 0.6, rates stable is 0.3, and rates falling is 0.1. -What is the expected payoff of the 5-year ARM?

A) $ 17,872.90 B) $ 53,618.60 C) $ 48,805.20 D) $ 20,081.80 A) $ 17,872.90 B) $ 53,618.60 C) $ 48,805.20 D) $ 20,081.80

Use the information below to answer the following questions). 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 below information to answer the following questions). Below is a payoff table with three mortgage options: \[\begin{array} { | l | l | c | c | } \hline & &{ \text { Outcame } } \\ \hline \text { Probability } & { 0.6 } & { 0.3 } & { 0.1 } \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] -What is the expected opportunity loss for the 3-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 below to answer the following questions). The payoff table given below lists four mortgage options: \[\begin{array} { | l | l | c | c | } \hline && { \text { Outcome } } \\ \hline \text { Probability } & 0.6 & { 0.3 } & 0.1 \\ \hline \text { Decision } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { 1-year ARM } & \$ 66,645 & \$ 43,650 & \$ 38,560 \\ \hline \text { 3-year ARM } & \$ 62,857 & \$ 47,698 & \$ 42,726 \\ \hline \text { 5-year ARM } & \$ 55,895 & \$ 50,894 & \$ 48,134 \\ \hline \text { 30-year fixed } & \$ 52,276 & \$ 52,276 & \$ 52,276 \\ \hline \end{array}\] 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

Use the information below to answer the following questions). 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

Use the information below to answer the following questions). 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 worst payoff rate for the 5-year ARM?

A) $ 50,894 B) $ 48,134 C) $ 51,641 D) $ 55,895 A) $ 50,894 B) $ 48,134 C) $ 51,641 D) $ 55,895

Use the information below to answer the following questions). 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

Use the information below to answer the following questions). Below are four options for an investment decision. \[\begin{array} { | l | l | l | l | } \hline \text { Decision/event } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { Bank CD } & \mathbf { 0 . 8 0 } & 0.80 & 0.80 \\ \hline \text { Bond fund } & - 0.75 & 0.86 & 1.50 \\ \hline \text { Index fund } & 0.00 & 0.90 & 1.20 \\ \hline \text { Growth fund } & - 0.30 & 0.70 & 1.40 \\ \hline \end{array}\] -Which of the following is the average utility for the index fund decision?

A) 1.05 B) 0.70 C) 0.60 D) 0.45 A) 1.05 B) 0.70 C) 0.60 D) 0.45

Use the information below to answer the following questions). Below are four options for an investment decision. \[\begin{array} { | l | l | l | l | } \hline \text { Decision/event } & \text { Rates Rise } & \text { Rates Stable } & \text { Rates Fall } \\ \hline \text { Bank CD } & \mathbf { 0 . 8 0 } & 0.80 & 0.80 \\ \hline \text { Bond fund } & - 0.75 & 0.86 & 1.50 \\ \hline \text { Index fund } & 0.00 & 0.90 & 1.20 \\ \hline \text { Growth fund } & - 0.30 & 0.70 & 1.40 \\ \hline \end{array}\] -Identify the average utility for the growth fund decision.

A) 1.05 B) 0.70 C) 0.20 D) 0.60 A) 1.05 B) 0.70 C) 0.20 D) 0.60

Exam 16: Decision Analysis

Use the information below to answer the following questions) 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 fundrai'er 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 21

What is the expected value of sample information?

(Essay)

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Question 22

Use the information below to answer the following questions). The payoff table given below lists four mortgage options: Outcome Probability 0.6 0.3 0.1 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 of the 5-year ARM?

(Multiple Choice)

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Question 23

Use the information below to answer the following questions). 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 24

Use the below information to answer the following questions). Below is a payoff table with three mortgage options: Outcame Probability 0.6 0.3 0.1 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 3-year ARM?

(Multiple Choice)

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Question 25

Use the information below to answer the following questions). The payoff table given below lists four mortgage options: Outcome Probability 0.6 0.3 0.1 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 26

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

(True/False)

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Question 27

What are the three elements required to characterize decisions with uncertain consequences?

(Essay)

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Question 28

Use the information below to answer the following questions). 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 29

An) is a matrix whose rows correspond to decisions and whose columns correspond to events.

(Multiple Choice)

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Question 30

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

(True/False)

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Question 31

Use the information below to answer the following questions). 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 32

Use the information below to answer the following questions) 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. -If the marketing report is u'favorable, what is the probability of low demand?

(Multiple Choice)

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Question 33

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 34

Use the information below to answer the following questions). 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 worst payoff rate for the 5-year ARM?

(Multiple Choice)

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Question 35

Use the information below to answer the following questions). 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 36

Use the information below to answer the following questions). Below are four options for an investment decision. Decision/event Rates Rise Rates Stable Rates Fall Bank CD 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 index fund decision?

(Multiple Choice)

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Question 37

Use the information below to answer the following questions). 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 mode obtained from the simulation results? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 38

For the average payoff strategy, the decision with the best average payoff is chosen.

(True/False)

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Question 39

Use the information below to answer the following questions). Below are four options for an investment decision. Decision/event Rates Rise Rates Stable Rates Fall Bank CD 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 -Identify the average utility for the growth fund decision.

(Multiple Choice)

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Question 40

What is the expected value of sample information?

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

What are the three elements required to characterize decisions with uncertain consequences?

An) is a matrix whose rows correspond to decisions and whose columns correspond to events.

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

Answer the following questions by creating a decision tree. -Which of the following is considered the best expected value decision?

For the average payoff strategy, the decision with the best average payoff is chosen.

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