Question

Data:

A financial planning firm has a decision to make. The company can buy more stocks (B) now, not buy and not sell stock (N) now, or it can sell its stock (S) now.

The future market will be either Bear (E) or Bull (U). The following is a payoff table, in thousands of dollars, of profit or loss for this firm based on the decision the firm makes now and the future market.

	E	U
B	44	-29
N	24	-11
S	18	4

The statisticians of the company, using their standard budget, predict the following probabilities:

P(E) = 0.6                                             P(U) = Complement

The statisticians report that if the company is charged and additional $5,000 above the standard fee, they can do more accurate research to obtain sample information that will either be Favorable (F) or Unfavorable (X) with the following probabilities:

P(F) = 0.65                                           P(X) = Complement

If the research is favorable, the revised probabilities are:

P(E) = 0.81                                          P(U) = Complement

If the research is unfavorable, the revised probabilities are:

P(E) = 0.4                                  P(U) = Complement

Assignment:

Do all calculations, including making the decision tree and any algebra, in Excel; organize it and highlight important boxes in colors so that it can be read and understood very easily. Put question numbers next to the answers. You may want to use multiple sheets, but please use only one file. Write out all answers, including #15 and #21 in Excel. For all algebra, show work [the written steps you went through to find the answer] and type that into Excel. Do not submit the paper you may have used to solve the algebra, just copy it and put it all in Excel.

Please complete the following in Excel, highlighting the answers.

Find the following:

1. The decision using the optimistic approach.
2. The decision using the conservative approach.
3. The decision using the minimax regret approach.
4. The decision using the Expected Opportunity Loss (EOL)
5. EV(B)
6. EV(N)
7. EV(S)
8. Best EMV = The decision using EV
9. EVwPI
10. EVPI

Answer 1

	E	U	E (With Cost)	U (With Cost)
						Decision using the Expected Opportunity Loss (EOL)	13.2 (B)
B	44	-29	39	-34
N	24	-11	19	-16		Decision using the minimax regret approach.	20 (N)
S	18	4	13	-1
Probability (State)	0.6	0.4
Probability (State/F)	0.81	0.19				Decision with the optimistic Approach	44 (B, E)
Probability(State/X)	0.4	0.6
						Decision with the Conservative Approach	4 (S,U)
Probability (F)	0.65		EVPI	28
Probability(X)	0.35		EVwPI	14.8		E(B)	14.8
						E(N)	10
						E(S)	12.4
EV(Node 2)	25.13		EV(Node 8)	14.8		EV(If more Accurate Research is conducted, Node 1)	17.9445
EV(Node 3)	12.35		EV(Node 9)	10
EV(Node 4)	10.34		EV(Node 10)	12.4
						EV(If Standard Research is conducted)	14.8
EV(Node 5)	-4.8
EV(Node 6)	-2
EV (Node 7)	4.6