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 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

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. -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 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 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

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 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

Exam 16: Decision Analysis

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 30-year fixed decision?

(Multiple Choice)

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Question 41

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. -Which of the following decisions has the largest expected payoff?

(Multiple Choice)

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Question 42

What is the expected value of perfect information?

(Essay)

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Question 43

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 probability that the drug will not reach the market? [Hint: Choose the approximate value.]

(Multiple Choice)

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Question 44

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

(Essay)

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Question 45

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 bond fund decision?

(Multiple Choice)

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Question 46

What are the differences between an aggressive strategy and a conservative strategy?

(Essay)

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Question 47

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

(Multiple Choice)

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Question 48

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 best payoff rate for the 1-year ARM?

(Multiple Choice)

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Question 49

What is the expected value of perfect information?

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

What are the differences between an aggressive strategy and a conservative strategy?

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