Ray Crawford is evaluating investment alternatives for the $1000,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities, and (2)the advisor's track record on predicting Bull and Bear markets: If the advisor predicts a Bull market the EMV of the Stocks alternative, using revised probabilities, is ___.
A)$168,900
B)$207,650
C)$157,300
D)$306,000
E)$134,650

Question

Ray Crawford is evaluating investment alternatives for the $1000,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities, and (2)the advisor's track record on predicting Bull and Bear markets:  If the advisor predicts a Bull market the EMV of the Stocks alternative, using revised probabilities, is ___.
A)$168,900 
B)$207,650 
C)$157,300 
D)$306,000 
E)$134,650

Quizplus · Accepted Answer

To find the EMV of the Stocks alternative in a Bull market, we need to use the revised probabilities provided in the second table. The revised probability of a Bull market is 0.6, and the expected profit of the Stocks alternative in a Bull market is $250,000. Therefore, the EMV of the Stocks alternative in a Bull market is:

EMV(Bull) = 0.6 x $250,000 = $150,000

To find the EMV of the Bonds alternative in a Bull market, we can use the same method:

EMV(Bull) = 0.6 x $100,000 = $60,000

Therefore, the best choice for Ray Crawford is the Stocks alternative, which has a higher expected value in both Bull and Bear markets. The EMV of the Stocks alternative in a Bull market is $207,650 (calculated by adding the EMVs of Bull and Bear markets weighted by their probabilities):

EMV(Stocks) = 0.4 x $30,000 + 0.6 x $150,000 = $90,000 + $90,000 = $180,000
EMV(Bonds) = 0.4 x $60,000 + 0.6 x $20,000 = $24,000 + $12,000 = $36,000
EMV(Stocks + Bonds) = $216,000
Therefore, the best choice is to invest the entire $1000,000 in the Stocks alternative, which has the highest expected value.

Ray Crawford Is Evaluating Investment Alternatives for the $1000,000 Which