Ray Crofford is evaluating investment alternatives for the $100,000 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 Bonds alternative,using revised probabilities,is ________.
A) $85,240
B) $25,710
C) $108,450
D) $75,480

Question

Ray Crofford is evaluating investment alternatives for the $100,000 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 Bonds alternative,using revised probabilities,is ________.
A) $85,240 
B) $25,710 
C) $108,450 
D) $75,480

Quizplus · Accepted Answer

To find the EMV of the Bonds alternative when the advisor predicts a Bull market, we need to revise the probabilities in the table according to the advisor's track record:

- P(Bull) = 0.7 x 0.6 + 0.3 x 0.2 = 0.48 
- P(Bear) = 1 - P(Bull) = 0.52

Now we can calculate the expected profits:

- Bonds (Bull): $110,000 x 0.48 + $80,000 x 0.52 = $99,200

Therefore, the EMV of the Bonds alternative, using revised probabilities, is $99,200.

Comparing this to the EMV of the Stock alternative:

- Stock (Bull): $130,000 x 0.48 + $60,000 x 0.52 = $93,600

We can see that the Bonds alternative has a higher EMV when the advisor predicts a Bull market. Therefore, the best choice for Ray Crofford would be to invest in Bonds when the advisor predicts a Bull market.

Ray Crofford Is Evaluating Investment Alternatives for the $100,000 Which