Assume you have a sum of money available which you would like to invest in one of the two available investment plans: Stocks or bonds. The conditional payoffs of each plan under two possible economic conditions are as follows:
a.If the probability of Economic Condition I occurring is 0.8, where should you invest your money? Use the expected value criterion and show your complete work.
b.Compute the expected value of perfect information (EVPI).
c.What kind of probabilities of Economic Conditions I and II should there be before you would be indifferent between investing in stocks and bonds? (i.e., compute the probabilities for which you will be indifferent between investing in stocks or bonds.)

Question

Assume you have a sum of money available which you would like to invest in one of the two available investment plans: Stocks or bonds. The conditional payoffs of each plan under two possible economic conditions are as follows:  
a.If the probability of Economic Condition I occurring is 0.8, where should you invest your money? Use the expected value criterion and show your complete work.
b.Compute the expected value of perfect information (EVPI).
c.What kind of probabilities of Economic Conditions I and II should there be before you would be indifferent between investing in stocks and bonds? (i.e., compute the probabilities for which you will be indifferent between investing in stocks or bonds.)

Quizplus · Accepted Answer

The Answer of Assume you have a sum of money available which you would like to invest in one of the two available investment plans: Stocks or bonds. The conditional payoffs of each plan under two possible economic conditions are as follows:  
a.If the probability of Economic Condition I occurring is 0.8, where should you invest your money? Use the expected value criterion and show your complete work.
b.Compute the expected value of perfect information (EVPI).
c.What kind of probabilities of Economic Conditions I and II should there be before you would be indifferent between investing in stocks and bonds? (i.e., compute the probabilities for which you will be indifferent between investing in stocks or bonds.)

Assume You Have a Sum of Money Available Which You