1. You have received your MBA from Trinity University and been hired by Deutsche Bank as the Executive Vice President of Finance. You negotiated a hefty salary and received a signing bonus, so you are relied upon heavily to make decisions using quantitative methods. Today, you are faced with three investment alternatives with the following payoffs (thousands of dollars).
Economic Conditions
|
Decision Alternative
|
Up(s1)
|
Stable(s2)
|
Down(s3)
|
|
Investment A(d1)
|
100
|
25
|
0
|
|
Investment B(d2)
|
75
|
50
|
25
|
|
Investment C(d3)
|
50
|
50
|
50
|
|
Probability Assessments
|
0.70
|
0.10
|
0.20
|
- Using the expected value approach, which decision is preferred?
- For the lottery having a payoff of $100,000 with probability p and $0 with probability (1-p), three decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach.
Indifference Probability (p)
|
Profit
|
Decision Maker A
|
Decision Maker B
|
Decision Maker C
|
|
$75,000
|
0.80
|
0.60
|
.90
|
|
$50,000
|
0.60
|
0.30
|
.70
|
|
$25,000
|
0.30
|
0.15
|
.50
|