Deck 16: Decision Analysis

Question 1

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

A) decision tree model
B) payoff table
C) utility function table
D) scoring model

Answer 1

B

Question 2

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

Answer 2

$ 14,369

Question 3

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 worst payoff rate for the 5-year ARM?

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

Answer 3

$ 55,895

Question 4

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

Question 5

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 worst expected value decision?

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

Question 6

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

Question 7

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

Question 8

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.]

A) $ 119.1
B) $ 116.1
C) $ 105.7
D) $ 94.4

Question 9

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

Question 10

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.]

A) $ 119.0
B) $ 116.1
C) $ 105.7
D) $ 94.0

Question 11

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 of the 5-year ARM?

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

Question 12

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

Question 13

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

Question 14

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

A) opportunity-loss strategy
B) aggressive strategy
C) conservative strategy
D) average payoff strategy

Question 15

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

Question 16

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

Question 17

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 5-year ARM?

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

Question 18

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

Question 19

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.]

A) $ 119.0
B) $ 116.1
C) $ 106.2
D) $ 94.4

Question 20

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

A) $ 119.0
B) $ 116.1
C) $ 105.7
D) $ 94.1

Question 21

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.
The expected value of perfect information (EVPI) is equal to the .

A) Expected Monetary Value (EMV) with perfect information minus the EMV without any information
B) EMV with perfect information divided by the EMV without any information
C) sum of the EMV with information and the EMV without any information
D) EMV without any information minus the EMV with perfect information

Question 22

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 3-year ARM?

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

Question 23

The expected value of sample information (EVSI) is equal to the .

A) EMV without sample information divided by the EMV with sample information
B) EMV without sample information minus the EMV with sample information
C) sum of the EMV with sample information and the EMV without sample information
D) EMV with sample information minus the EMV without sample information

Question 24

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

Question 25

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.]

A) $ 442.50
B) $ 472.00
C) $ 410.00
D) $ 501.50

Question 26

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?

A) -$40
B) -$50
C) $30
D) $60

Question 27

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.
What is the likelihood for high demand knowing that the market report is favorable?

A) 84%
B) 90%
C) 87%
D) 80%

Question 28

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

Question 29

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

Question 30

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.
If the probability of selling the full-fare ticket is 0.80, what is the expected value of the ticket?

A) $ 442.50
B) $ 472.00
C) $ 501.50
D) $ 531.00

Question 31

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.
Greg is indifferent between receiving $2,000, and taking a chance at $2,500 with probability 0.7 and losing $1200 with probability 0.5. What is the expected value of this gamble?

A) $ 1,150
B) $ 1,800
C) $ 1,460
D) $ 2,045

Question 32

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 formulas is used to determine the exponential utility function?

A) U(x) = 1 + e-x/R
B) U(x) = 1× ex/R
C) U(x) = 1/ exR
D) U(x) = 1 - e-x/R

Question 33

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

-Identify the average utility for the growth fund decision.

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

Question 34

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

Question 35

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.
If the marketing report is unfavorable, what is the probability of low demand?

A) 84%
B) 90%
C) 87%
D) 80%

Question 36

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

Question 37

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

Question 38

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.]

A) 1.587
B) 1.122
C) 2.015
D) 1.890

Question 39

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

A) 0.95
B) 0.89
C) 0.77
D) 0.82

Question 40

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 index fund decision?

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

Question 41

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

Question 42

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

Question 43

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

Question 44

What is the expected value of perfect information?

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

What is the expected value of sample information?

Question 50

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