Deck 11: Decisions, uncertainty, and Risk

Question 1

Use the below payoff table with four mortgage options to answer the following question(s).
Which of the following strategies is also called a minimax regret strategy?

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

Answer 1

opportunity loss strategy

Question 2

Which of the following best defines a scoring model?

A)It is a quantitative assessment of the discount rate that makes the total present value of all cash flows sum to zero.
B)It is a quantitative assessment of a decision alternative's value based on a set of attributes.
C)It is a quantitative assessment of the rate of return required by management to accept a project.
D)It is a quantitative assessment of the number of time periods before the cash inflows of a proposed project equal the amount of the initial investment.

Answer 2

It is a quantitative assessment of a decision alternative's value based on a set of attributes.

Question 3

Below is the spreadsheet for Trance Electronics. Calculate the IRR using the IRR function.

A)12.63%
B)14.35%
C)17.57%
D)20.28%

Answer 3

17.57%

Question 4

Which of the following criteria represents the discount rate that makes the total present value of all cash flows sum to zero?

A)net present value
B)payback period
C)return on investment
D)internal rate of return

Question 5

Use the below payoff table with four mortgage options to answer the following question(s).
What is the average payoff for the 5-year ARM?

A)$55,046
B)$57,724
C)$53,406
D)$51,448

Question 6

Which of the following best defines payback period?

A)It is the number of time periods before the cash inflows of a proposed project exceed the amount of the initial investment.
B)It is the number of time periods before the amount of the initial investment exceeds the cash inflows of a proposed project.
C)It is the number of time periods before the cash inflows of a proposed project equal the amount of the initial investment.
D)It is the number of time periods before the net expenditure exceeds the amount of the initial investment.

Question 7

Use the below payoff table with four mortgage options to answer the following question(s).
Which of the following formulas is used to calculate the coefficient of variation?

A)variance/mean
B)mean/variance
C)standard deviation/mean
D)mean/standard deviation

Question 8

Use the below payoff table with four mortgage options to answer the following question(s).
Which of the following decisions is chosen in a minimin strategy?

A)the decision that minimizes the maximum payoff
B)the decision that maximizes the minimum payoff
C)the decision that minimizes the minimum payoff
D)the decision that maximizes the maximum payoff

Question 9

Use the below payoff table with four mortgage options to answer the following question(s).
What is the best payoff rate for the 3-year ARM?

A)$53,405
B)$64,547
C)$44,897
D)$49,564

Question 10

Use the below payoff table with four mortgage options to answer the following question(s).
What is the worst payoff rate for the 5-year ARM?

A)$57,325
B)$50,124
C)$53,405
D)$52,768

Question 11

Which of the following criteria represents the dollar amount of change in the value of the firm as a result of choosing a decision?

A)net present value
B)payback period
C)return on investment
D)internal rate of return

Question 12

Use the below payoff table with four mortgage options to answer the following question(s).
Which of the following decisions is chosen in a minimax strategy?

A)the decision corresponding to the maximum value of the largest cost
B)the decision corresponding to the maximum value of the smallest cost
C)the decision corresponding to the minimum value of the smallest cost
D)the decision corresponding to the minimum value of the largest cost

Question 13

A matrix whose rows correspond to decisions and whose columns correspond to events is called a ________.

A)payoff table
B)scoring model
C)decision tree model
D)conditional probability table

Question 14

A rate of return required by management to accept a project is called ________.

A)hurdle rate
B)net present rate
C)rate of inflation
D)payoff rate

Question 15

Milton Inc.generates annual revenue of $375,000,000 and incurs annual costs of $95,000,000.The initial investment amounts to $450,000,000.What is the company's return on investment?

A)76%
B)43%
C)55%
D)62%

Question 16

Use the below payoff table with four mortgage options to answer the following question(s).
What is the worst payoff rate for the 1-year ARM?

A)$45,750
B)$40,960
C)$51,720
D)$68,452

Question 17

Use the below payoff table with four mortgage options to answer the following question(s).
What is the average payoff for the 1-year ARM?

A)$57,101
B)$51,721
C)$54,709
D)$43,355

Question 18

An investment requires an initial cash outlay of $110,000 and additional outlays of $65,000 at the end of each of the first three years.This investment is expected to result in incomes of $55,000 at the end of the first year,$80,000 at the end of the second year,$95,000 at the end of the third year,and $135,000 at the end of the fourth year.Calculate the IRR using the IRR function.

A)12.05%
B)15.41%
C)8.38%
D)19.73%

Question 19

Use the below payoff table with four mortgage options to answer the following question(s).
Which of the following decisions is chosen in a minimax regret strategy?

A)the decision that minimizes the largest opportunity loss
B)the decision that maximizes the smallest opportunity loss
C)the decision that minimizes the smallest opportunity loss
D)the decision that maximizes the largest opportunity loss

Question 20

Use the below payoff table with four mortgage options to answer the following question(s).
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 21

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the variance of the Y index fund?

A)22.78
B)4.69
C)18.66
D)8.80

Question 22

Use the below payoff table with four mortgage options to answer the following question(s).
Which of the following best defines Sharpe ratio?

A)It is a ratio of a fund's excess returns to its coefficient of variation.
B)It is a ratio of a fund's excess returns to its standard deviation.
C)It is a ratio of a fund's excess returns to its variance.
D)It is a ratio of a fund's excess returns to its mean.

Question 23

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the standard deviation of the X index fund?

A)3.07
B)2.79
C)3.27
D)2.69

Question 24

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the variance of the W index fund?

A)18.66
B)10.57
C)10.72
D)12.12

Question 25

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the coefficient of variation of the W index fund?

A)10.58
B)2.37
C)3.00
D)2.42

Question 26

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the coefficient of variation of the Z index fund?

A)10.58
B)2.37
C)2.42
D)3.00

Question 27

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
Which index fund has the lowest return to risk ratio?

A)Q index fund
B)W index fund
C)X index fund
D)Z index fund

Question 28

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the variance of the X index fund?

A)8.80
B)22.78
C)4.69
D)16.40

Question 29

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the standard deviation of the X index fund?

A)5.13
B)2.17
C)4.77
D)2.97

Question 30

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the variance of the Z index fund?

A)7.22
B)7.79
C)9.41
D)10.72

Question 31

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
Which index fund has the lowest expected monetary value?

A)Q index fund
B)W index fund
C)X index fund
D)Z index fund

Question 32

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the standard deviation of the Q index fund?

A)3.07
B)2.79
C)3.27
D)2.69

Question 33

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the expected monetary value (in $)of the X index fund?

A)1.38
B)0.29
C)1.11
D)0.93

Question 34

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the expected monetary value (in $)of the Q index fund?

A)1.38
B)0.29
C)1.11
D)0.93

Question 35

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the return to risk ratio of the Q index fund?

A)0.33
B)0.09
C)0.41
D)0.42

Question 36

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
Which index fund would be the best for the day trader to invest in?

A)Q index fund
B)W index fund
C)X index fund
D)Z index fund

Question 37

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the return to risk ratio of the X index fund?

A)0.41
B)0.09
C)0.42
D)0.28

Question 38

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
Which index fund has the lowest standard deviation?

A)Q index fund
B)W index fund
C)X index fund
D)Z index fund

Question 39

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
Which index fund has the highest coefficient of variation?

A)Q index fund
B)W index fund
C)X index fund
D)Z index fund

Question 40

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
Which index fund has the highest variance?

A)Q index fund
B)W index fund
C)X index fund
D)Z index fund

Question 41

Decision trees consist of a set of ________ and ________.

A)decision nodes; event nodes
B)rectangles; squares
C)stems; leaves
D)nodes; branches

Question 42

Use the below decision tree illustrating the R&D process for a new drug to answer the following question(s). Provided Dollar amounts in the decision tree are in millions.
How many event nodes are observed in the given decision tree?

A)2
B)3
C)4
D)7

Question 43

Use the below decision tree illustrating the R&D process for a new drug to answer the following question(s). Provided Dollar amounts in the decision tree are in millions.
How many decision nodes are observed in the given decision tree?

A)2
B)3
C)4
D)7

Question 44

What is the rollback value when clinical trials are conducted on the product?

A)$169.7
B)$(445.0)
C)$335.2
D)$(252.5)

Question 45

What is the terminal value when the market potential is medium?

A)$1,955
B)$(445)
C)$(250)
D)$1,355

Question 46

What is the rollback value if the product is approved by the FDA?

A)$3,900
B)$1,499
C)$1,955
D)$2,795

Question 47

What is the terminal value when the market potential is large?

A)$1,955
B)$3,455
C)$(445)
D)$(250)

Question 48

What is the rollback value when the product is sent for FDA approval?

A)$3,900
B)$1,499
C)$1,955
D)$2,795

Question 49

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
For the given two-asset portfolio,what is the portfolio risk?

A)2.97
B)1.69
C)2.39
D)2.17

Question 50

What is the terminal value if the drug is not approved by the FDA?

A)$(250)
B)$1,335
C)$1,955
D)$(445)

Question 51

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the standard deviation of the Y index fund?

A)5.17
B)4.77
C)2.17
D)2.97

Question 52

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
The covariance between these two assets indicates that ________.

A)the overall risk increases
B)the overall risk reduces
C)the X index fund is riskier than the Y index fund
D)there is no risk involved

Question 53

What is the terminal value if clinical trials conducted are not successful?

A)$(250)
B)$1,335
C)$(400)
D)$1,955

Question 54

Which of the following is a decision node?

A)whether or not FDA approved
B)whether or not clinical trials are successful
C)whether or not to seek FDA approval
D)whether the market is large,medium,or small

Question 55

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the expected return (in $)of the given two-asset portfolio?

A)1.90
B)1.62
C)2.39
D)1.33

Question 56

What is the terminal value if the development is stopped before conducting clinical trials?

A)$(250)
B)$1,955
C)$3,455
D)$(445)

Question 57

What is the terminal value when the market potential is small?

A)$(250)
B)$3,455
C)$1,355
D)$(445)

Question 58

Use the table below to answer the following question(s).
Below is a spreadsheet for a situation in which a day trader wants to decide on investing $200 in one of the index funds. Answer the following questions using PHStat.
What is the covariance between the two assets?

A)4.64
B)4.69
C)4.77
D)4.81

Question 59

What is the rollback value if clinical trials conducted are successful?

A)$(400)
B)$(445)
C)$1,955
D)$1,499

Question 60

What is the terminal value if the development is stopped after clinical trials conducted are successful?

A)$(250)
B)$(400)
C)$1,335
D)$3,455

Question 61

Aggressive decision makers are called speculators because they increase their exposure to risk in hopes of increasing their return.

Question 62

A typical charity raffle involves selling one thousand $50 tickets to win a $30,000 grand prize.If the probability of winning is only 0.002,what is the expected payoff?

A)$(35.50)
B)$25.65
C)$(50.25)
D)$10.10

Question 63

After conducting clinical trials,seeking FDA approval,and marketing the drug,what is the expected net revenue (millions of $)?

A)$450.0
B)$169.7
C)$238.4
D)$375.5

Question 64

The Expected Value of Sample Information (EVSI)is ________.

A)the sum of the EMV with sample information (assumed at no cost)and the EMV without sample information
B)the EMV with sample information (assumed at no cost)minus the EMV without sample information
C)the EMV without sample information (assumed at no cost)minus the EMV with sample information
D)the EMV without sample information divided by the EMV with sample information (assumed at no cost)

Question 65

Below is a decision tree for the airline revenue management.Create a one-way data table to answer the following question(s).
If the probability of selling the full-fare ticket is 0.85,what is the expected value of the ticket?

A)$420
B)$450
C)$480
D)$510

Question 66

What is the probability that the drug reaches a small market?

A)0.180
B)0.081
C)0.018
D)0.108

Question 67

Repetitive decisions have little financial impact and are not considered very risky.

Question 68

An individual is indifferent between receiving a guaranteed amount of $1,000 and taking a chance of receiving $1,500 with probability 0.75 and losing $800 with probability 0.25.What is the expected value of this gamble?

A)$1,000
B)$740
C)$925
D)$650

Question 69

How is the Expected Value of Perfect Information (EVPI)calculated?

A)the sum of the EMV with perfect information (assumed at no cost)and the EMV without any information
B)the EMV without any information (assumed at no cost)minus the EMV with perfect information
C)the EMV with perfect information (assumed at no cost)divided by the EMV without any information
D)the EMV with perfect information (assumed at no cost)minus the EMV without any information

Question 70

What is the probability of the drug getting to a market of medium potential?

A)0.054
B)0.120
C)0.018
D)0.700

Question 71

Opportunity losses can only be nonnegative values.

Question 72

The payoffs are profits as opposed to costs.Therefore,using the aggressive strategy,the decision to develop the drug has been made because it ________.

A)minimizes the maximum payoff
B)maximizes the minimum payoff
C)minimizes the minimum payoff
D)maximizes the maximum payoff

Question 73

What is the probability that the clinical trials conducted on the drug are not successful?

A)0.108
B)0.018
C)0.054
D)0.700

Question 74

What is the probability that the drug reaches to a large market?

A)0.700
B)0.108
C)0.018
D)0.054

Question 75

In general,the ________ is the amount an individual is willing to forgo to avoid risk.

A)breakeven probability
B)risk premium
C)expected opportunity loss
D)portfolio risk

Question 76

What is the probability that the drug is not approved by the FDA?

A)0.700
B)0.108
C)0.120
D)0.054

Question 77

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

Question 78

Below is a decision tree for the airline revenue management.Create a one-way data table to answer the following question(s).
What is the expected value of the ticket when a discount is offered on the fare?

A)$420
B)$600
C)$450
D)$480

Question 79

Below is a decision tree for the airline revenue management.Create a one-way data table to answer the following question(s).
If the probability of selling the full-fare ticket is 0.50,what is the expected value of the ticket?

A)$210
B)$300
C)$480
D)$420

Question 80

If IRR is greater than the hurdle rate,the management should reject the project.